By Evan Falchuk

A poll released last week was billed as showing that “Employer-Based Health Care ‘Not Sustainable’.”

But is it really true?

To answer, you have to realize that there isn’t a solitary system of “employer-based” health care.  In fact there are at least three very different kinds.  And while at least one is deeply troubled, the others are actually engines of innovation in health care cost and quality.

You can divide American businesses into three categories (all data from the U.S. Census Bureau):

• Smaller businesses.  Companies with 1-500 employees.  These companies employ some 55 million Americans.

• Mid-size businesses.  These companies have between 500 and 2,500 employees, and employ about 14 million people.

• Large businesses, with more than 2,500 employees. These companies employ about 43 million people.

Put together, these groups may provide coverage for 200 million Americans, if you assume that many of these employees have their families covered in this way.  But even though they cover most Americans, the experience of each group is very different.

Smaller businesses don’t always offer health insurance, but when they do, they are what is called “fully insured.”  They take no insurance risk themselves, but buy an insurance policy and give that policy to their employees.  They have little ability to negotiate rates with insurers.  The rates they pay change (i.e. go up) each year based on the loss experience of the other smaller businesses covered by the insurer.  Sometimes the insurer may charge more based on that company’s experience during the year, too.

The cost of insurance for these groups is a burden, and it’s especially bad if you’re a very small employer or are an individual.  There isn’t much you can do about it if you’re in this category, other than make employees pay more of the premium, or buy more limited policies that cost less – the market is not very competitive.

Next, there are those employers with between 500 and 2,500 employees.  Many of these are fully insured, but the bigger they are, the more likely they are to be creative about their health coverage.  This typically means buying what is knows as “stop loss” coverage.  In stop loss, the employer “self insures” for health costs up to a certain level, and then buys insurance for everything above that.

Here’s how that works.  Imagine an employer pays $1 million a year in health insurance premiums and has claims each year that average about $500,000.  A clever employer might understand that no matter what happens it is going to pay at least $500,000 a year in health costs.  So why not just pay for everything up to $500,000 yourself and buy insurance to cover costs above that amount?  Insurance for that is much cheaper- for this example, let’s say it costs $250,000.  That means the employer’s cost is now only $750,000 ($500,000 plus the $250,000 premium) as opposed to $1 million.

But it gets better.  If for some reason the employer only has $450,000 in health expenses, that extra $50,000 goes right into the employer’s pocket.  For these groups, programs to promote employee health and well-being are increasingly attractive, because any reduction in medical losses can mean more profit for the employer (and a chance to negotiate lower stop loss rates with the insurer).

Above 2,500 employees, and especially above 5,000 employees, these trends accelerate.  By a certain size, these companies completely self-insure, which means they don’t buy health insurance at all.  To be sure, they hire a health insurer, but mainly to get access to the health plans’ negotiated rates with doctors and hospitals.  Large employers are very sophisticated about health care expenses, and very creative and innovative in their approaches to them.  In fact, some of the most  interesting innovations in health care are happening right now at large employers across the country.  These employers have the ability to do something about the cost of care – and don’t need Congress to do it for them – so they just do it.

So what does it all mean?

There’s a great desire to simplify the problem of health care, what I’ve called McAllenization.  But like with many things, the more you learn about something the more humility you ought feel about proposing sweeping changes to it.

And so I hope to help in some small way with that.  If you listened in last week for the webinar I did with EMC, you learned something about what one very innovative American company does with its health care benefits (we’re going to post the audio and slides soon).

In the next few weeks, I will post on the blog a series of Q&As with other leading U.S. companies on the innovative things they are doing with employer-based health care.  They all are having a real, meaningful impact on the cost and quality of health care, and policy makers would do well to hear these important stories.