“Starbucks will spend more on health insurance for its employees this year than on raw materials needed to brew its coffee”
– Howard Schultz, Chairman Starbucks
(AP 9/14/05)


Overview

87%. This is the cumulative rate of growth in total premiums cost for employer sponsored healthcare benefits between 2000 and 2005. The Consumer Price Index, the employer’s increase in their prices for their goods and services, rose 18% over the same period. Growth in worker’s earnings was 20%. This gap is why the Conference Board’s survey of CEOs includes healthcare expenditures as a top 10 challenge (7th for all companies, 5th for mid-cap companies).

An increase in healthcare expenditures of this magnitude is a material drag on margins. Annual increases in healthcare expenditures of this magnitude compared to significantly lower costs of global competitors put companies at a severe disadvantage in global markets.

Addressing this challenge became a priority in 2003, a year of 14% premium growth, for many companies. Beginning in 2004, companies of all sizes began to introduce changes to their healthcare benefit programs that have a direct impact on healthcare services purchasing decisions that can be influenced by company initiatives. The early returns are promising. Rate of growth in healthcare expenditures is moderating — 11% in 2004, 9% in 2005, and 8% in 2006. While the total change in the slope of the curve can not be attributed solely to employers, a significant proportion can. And, as important as the direct savings, is the transformational shift emerging in the healthcare value chain that is a result of take action attitude of the companies introducing innovative new ways of containing healthcare expenditures.

These emerging shifts in the healthcare value chain have direct strategic and tactical consequences for industry participants:

• For employers there is growing evidence that a programmatic selection and implementation of a portfolio of benefit offerings, including shifting their purchase to new entrants or existing entities with lower cost models, can reduce their exposure to healthcare expenditure inflation

• For traditional payers and providers the employers’ reduction in expenditures acts as a Zero Sum Game, i.e., a reduction in top line revenue and therefore margins unless they change their cost models – their value proposition.


“Better” Healthcare Purchasing Practices

An analysis of the 2006 increase in healthcare benefit premiums by the Kaiser Family Foundation and the total cost of healthcare premiums by company attributes by Towers Perrin highlight two important metrics within the aggregate averages.

• 13% of employees work for companies with premium increases >15%, 42% of employees work for companies with premium increases 5% or less (Kaiser Family Foundation)

• A gap exists between high and low-cost per employee companies of approximately $3000/employee (Towers Perrin)

These metrics suggest that there are emerging “better” practices for healthcare expenditures containment. That is, there are companies that are getting better returns – decreasing expenditures – for innovations their health benefits sponsorship. These “better” practices are often categorized as a shift to consumerism. A deeper review of the emerging practices however reveals that the gap in performance between high and low rates of increase and total costs is not the introduction of the simple concept of consumerism it is the disciplined and programmatic implementation of the strategy. The old adage that “strategy in necessary, but not sufficient” appears to hold true for healthcare expenditure containment just as it does for all other business transformation initiatives.

A sample of the emerging portfolio of offerings includes:

• Emphasis and better employee advantages communications of tax advantaged savings accounts (Health Savings Accounts) to increase Consumer Driven Health Plan enrollment

• Contracting with disease management companies to offer programs similar to employee assistance program for managing chronic illnesses

• Including pay-for-performance like payments to the employees to bring higher levels of behavioral compliance

• Contracting for an integrated series of on-site clinic events focused on prevention and eliminating employee lost time, e.g., health risk assessments and flu vaccinations

• Contracting with clinical delivery companies to build and staff full service clinics on sites with a concentration of employees and dependents

• Partnering with emerging convenient care clinics (clinics within retail stores such as drug stores) to offer in-network primary care near locations without concentrations of employees

• Providing as an employee assistance program access to third-party diagnostic review and treatment plan improvement

• Contracting with providers to provide technology enabled lower cost delivery, e.g., telemonitoring (linked to chronic illness programs), web-visits and consultations

These basic practices all have potential for containing the rate of growth of healthcare expenditures. What distinguishes companies that realize this potential is the rigor applied to implementation. Successful implementers are employing the same disciplined approaches and techniques, for example program management that they have used to address other strategic transformations.


Summary

Systemic changes are moving through the healthcare value chain driven by employer’s needs to contain their healthcare expenditures while simultaneously fulfilling their responsibility to provide competitive health benefits. Within the last two years there is growing evidence that an innovative portfolio of employer actions programmatically implemented can change the slope of the healthcare cost inflation curve materially. These actions are shifting revenue to providers bringing new value propositions. Provides that can sustain operating margins with this “reduced revenue” because they are employing very different cost models. And, are doing so without negating their foremost responsibility of providing quality care. In fact, along with the lower healthcare expenditures, many companies are enjoying the benefits of a healthier workforce.





Fletcher Lance

Vice President and Healthcare Practice Leader

615-972-5248

flance@northhighland.com


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