By Brian Klepper, PhD
It’s no secret that conventional U.S. health care arrangements have been ineffective in controlling health care costs. In 2008, the consulting firm PricewaterhouseCoopers estimated that more than half (54.5%) of all American health care spending delivers no value, and health care spending has continued to grow faster than the GDP plus inflation since then. The lack of normal price and outcomes transparency encourages excessive unit pricing and over-treatment. U.S. health care is now twice as costly as care in other industrialized nations, especially in high tech areas like specialty drugs and cancer treatments, and often has worse outcomes.
Health care’s cost burden has grim implications for businesses and employees. In those that buy health care for their employees and families, exorbitant health plan costs cut deeply into profits, limiting employee compensation and diverting resources away from other business and social priorities. Frustrated by the status quo, smart businesses increasingly are reconfiguring their health plans to take advantage of proven high performance services that deliver better health outcomes and lower costs. These approaches translate to stronger workforce recruitment and retention, and to programs that enhance their employees’ lives. Similar tactics are available to most any employer or union with a self-insured health plan.
The overwhelming fact that health care cost growth trends are unsustainable and a significant opportunity has moved several large companies to seek significant innovations in health care, and these could significantly impact health care’s landscape and function. Haven Healthcare, Amazon’s non-profit partnership with Berkshire Hathaway and JP Morgan, now led by Atul Gawande, MD. Walmart has developed a primary care offering and a strong pharmacy, and is making a play for seniors with lower over-the-counter medications and health supplies. Krogers is exploring pharmacy and other health care niches. Costco has established a fully transparent and efficient pharmacy benefit management function that it is using to acquire drugs for its own employees and other groups. In the technology sector, Google, Apple and Microsoft are developing products aimed at improved identification, monitoring and management of broad health status and specific conditions.
At the same time, an explosion of mostly small, “high-performance” health care organizations has emerged, consistently delivering superior health outcomes and/or lower cost than conventional approaches. In high-value niches, it makes good sense to bypass a plan administrator’s more traditional network arrangements, and develop direct relationships with vendors capable of guaranteeing better results. In musculoskeletal care, for example – typically about 20% of group health and 80% of occupational health spending – one provider consistently delivers better health outcomes in half the recovery time and at half the cost of conventional orthopedics. They’ll financially guarantee a 25% reduction in musculoskeletal spend on the patients they touch.
Compared with fully insured plans, the cost savings and care quality available from a customized self-insured structure with high performance direct contracting can be dramatic. Direct arrangements are typically more accountable: providers can be required to follow evidence, adopt flexible quality management programs, avoid unnecessary services, carefully track complications, and work within performance guarantees. Plan performance and employee satisfaction blossom, especially when employees who shop around for health care services share in the savings.
Three Practical Steps
Three key approaches can help employers cut unwarranted costs and gain direct control of their health plans’ quality:
1. Self-fund (or self-insure) your health plan.
Dramatic savings may be achieved in the first year of moving from fully insured plans. Fully insured employers with as few as 50 employees can partially self-fund. Under this structure, the company contracts for and covers the cost of its enrollees’ health care claims, but is protected from catastrophic or “shock loss” claims by reinsurance arrangements. Self-insurance allows broader control over benefit design – e.g., what’s covered and how the incentives work – as well as better access to information about the health plan’s cost, quality and safety performance. Both large (with >5,000 employees) and smaller (<5,000 employees) employers, encompassing both geographically-concentrated and -distributed employee groups, are increasingly requiring the same price and quality standards they rely on in their non-health care purchasing.
2. Next, avoid the self-funding administration services of a major carrier and work with an independent third party administrator (TPA) instead.
Independent TPAs are far more likely than the major health plans’ Administrative Services Only (ASO) units to meet even basic employer requirements: providing accountable reporting; accommodating access to innovative solutions; delivering access to more cost effective services; supporting more value-based direct contracting arrangements and providing financial guarantees for performance.
3. Consider developing direct contracting arrangements with proven high value vendors, especially if they offer performance guarantees.
We have found high-performance vendors in a range of clinical, financial and administrative risk management sectors: e.g., cardiometabolic care, musculoskeletal care, cancer management, drug management, imaging management, medical claims review, allergy management, ambulatory surgery, second opinion, large claims resolution, etc.
The 20:1-40:5 Campaign
While actual savings will vary based on how much an employer is already doing to manage costs, a savings goal of 20% in Year 1 and 40% by Year 5, with improved outcomes and employee satisfaction, is achievable for most fully insured employers. Within the current employer health plan environment, active promotion of these goals and other surprisingly simple purchasing and risk management principles can enhance awareness and motivate high value purchaser behavior. It goes without saying, for example, that the plan should seek to avoid all unnecessary care and related spending. Similarly, when care is needed, the plan should seek to identify, validate and advocate for high performance health care providers, while supporting and motivating employees’ efforts to find and use the highest value providers.
Perhaps most important, the approaches I’ve described here are not unique. They represent the same purchasing, value and risk management disciplines in health care that have been proven in most other areas of the economy. We simply need to apply them to health care.