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What Public Employee Health Plans Can Do to Improve Health Care Quality: Examples From the States


Quality Improvement in Health Care

Health care leaders, policymakers, and researchers have long recognized important deficiencies in the quality of care in the U.S. health care system. Limits to care quality can be observed by examining gaps between recommended care processes and outcomes and the actual performance of the health care system. Recent reports demonstrate how the quality of care varies from state to state; health care systems in leading states, on average, perform better than those in lagging states on multiple quality-related indicators. Moreover, researchers have long identified health care disparities that compromise the quality of care for certain populations based on environmental, social, economic, cultural, and other factors.

In recent years, large health care purchasers, including large employers, public programs, and other health system stakeholders, have experimented with a wide range of efforts to stimulate quality improvements, often combined with efforts to contain costs. Many large employers, for example, have developed quality initiatives independently, through employer coalitions, and through other multi-payer initiatives. Public purchasers, including Medicare and Medicaid, are increasingly adopting new quality-oriented measures, public reporting of provider performance, payment reforms, and other strategies.

Options available to improve care quality vary by the kind of indicators used, the types of incentives employed, and the specific populations targeted. Purchasers have experimented with varying forms of payment reform and other incentives to motivate quality improvement among hospitals, physicians, and other providers. Additionally, they use other strategies to influence individuals to make informed health care choices and to manage care more effectively. Many quality improvement strategies combine elements of these supply-side (i.e., provider) and demand-side (i.e., consumer) approaches, recognizing that deficiencies in care quality are the result of complex interactions of factors that require multifaceted responses.

State Employee Health Plans and Health Care Quality

Studies and reports have focused on states' efforts to improve care quality through public programs, such as Medicaid. This paper focuses on the quality improvement options available to states in their role as health care purchasers in public employee health plans (PEHPs).

PEHPs are large employer-based health plans providing health care benefits for about 13 million people across the United States. Those receiving health benefits through PEHPs include active state employees, covered dependents, retirees in state governments, employees in some local governments, and employees and dependents of other quasi-public entities, such as public universities and K–12 school systems. PEHPs are financed through general state and county revenues and premium contributions from participating public sector employers, employees, and their dependents. As large employers (or specifically, as health care purchasing entities serving public employers), PEHPs are responsible for an increasingly large share of state health care spending, second only to state Medicaid programs. In fiscal year 2003, the most recent year for which 50-state comparative data are available, state spending on public employee and retiree health benefits accounted for about 16 percent of total state health spending (excluding the federal share), on average, up from 10 percent in fiscal year 1997.

State PEHPs can contribute to quality improvement and affordability initiatives at the state level, including initiatives directly affecting traditional PEHP constituencies, as well as initiatives that benefit other populations. Given that state governments are typically the largest employer group in any given state, state PEHPs are responsible for a large volume of health care purchasing. This can yield considerable influence in negotiations with participating health plans and provider groups, in terms of encouraging their participation in quality improvement, cost containment, and related initiatives. In addition, state PEHPs may be in a position to combine their quality improvement activities and strategies with other large public and private sector purchasers, including Medicaid, other public programs, and private health plans and employer groups. The combined market leverage of such coalitions can enhance PEHPs' purchasing advantage and help to coordinate state-level quality promotion activities.

Geographic distribution plays an important role in PEHPs' purchasing leverage and focus. The vast majority of PEHP health care purchasing activity occurs within states' own borders, although some geographic regions within a state (e.g., the state capital or university locations) may have greater concentrations of public employees. In contrast, the broad trend of nationalization of private employers has increasingly resulted in private sector benefit decisions being made on a centralized basis and a lack of direct involvement with or concern for local or state market issues among many large employers. Furthermore, while private employers may be clustered in one or two locations within a state, PEHPs often administer benefits in every health care market throughout the state. This can provide PEHP leaders with knowledge of and influence in local health care markets.

Median job tenure in the public sector is about 80 percent higher than that of private employers. This means that PEHPs' targeted investments in health care quality initiatives can drive performance improvements over a longer time horizon than most large employers whose employees may move away or switch jobs more frequently. Because providers and health plans typically contract with multiple purchasers, state PEHP investments in quality promotion, directly or through third parties (e.g., health plans), may yield important results not only for primary PEHP constituencies but also for other individuals not covered by PEHPs. Therefore, quality improvement efforts may have a spillover impact on non-PEHP patients.

There are several key issues that may inhibit the ability of PEHPs to contribute to quality promotion activities at the state level. These include:

  • Size. While PEHPs are typically among the largest employer purchasing groups in any given state, even the largest PEHPs only account for a relatively small percentage of total health care spending in the state. For example, despite covering over 1.3 million lives, the California Public Employee Retirement System (CalPERS) accounts for less than 4 percent of total health care purchasing in California.
  • Market variability. State market conditions vary considerably from state to state, which can affect the range of options available to any given PEHP. For example, a PEHP seeking to stimulate or leverage competition based on performance may be limited if there are few health plan options in the state.
  • State regulations. Cumbersome state purchasing rules and procedures may challenge innovative purchasing efforts developed by even the most determined and visionary PEHP staff, governing boards, and policymakers.
  • Financial issues. Most states are grappling with new public accounting standards and difficult state budgetary conditions that prioritize cost containment over quality promotion activities. Thus, even large and assertive PEHPs may be constrained in their ability to focus on quality improvement efforts unless those efforts also address the cost of care and other pressing policy priorities.
  • Focus on cost containment. In general, public employees typically receive more generous benefits compared with their counterparts in the private sector. These richer benefits often involve higher costs, which may motivate state PEHPs to link quality improvement initiatives with cost containment efforts. Focusing on cost containment, however, may limit the quality improvement options available.
  • Political environment. State health care purchasing may be subject to the political will of state legislatures and the influence of unions, thereby influencing the options available to particular PEHPs.

Little is known about the role state PEHPs play in the broader state health policy environment. In contrast, researchers have examined other larger public health care purchasers to determine the impacts of purchasing behavior and contracting approaches on health system development and performance. Such studies emphasize the great potential Medicare and other public purchasers have to influence health system stakeholders (e.g., managed care organizations, physicians, hospitals, consumers).

This paper explores some of the options available to public and private purchasers to influence improvements in health care quality. When reviewing these options, PEHP executives and policymakers, should consider the following questions:
  • What options are available to state PEHPs to drive improvements in health
    care quality?
  • What are the key barriers or constraints facing state PEHPs in their efforts to improve care quality?
  • To what extent can the quality promotion activities of state PEHPs affect not only covered state employees, retirees, and their dependents, but also health system performance more broadly?

Publication Details



A. McKethan, T. Savela, and W. Joines, What Public Employee Health Plans Can Do to Improve Health Care Quality: Examples From the States, The Commonwealth Fund, January 2008.