We are experiencing the strangest election in my lifetime due, overwhelmingly, to the fact that the middle class is in an economic depression. The vast majority of the workforce receives health benefits through their employer and uncontrolled healthcare spending has kept the middle class from seeing any wage increase over the last 20 years. It’s stupefying how companies, that will rigorously check whether there’s a receipt for a $58 dinner an employee reported, will literally squander millions unnecessarily on healthcare by using PPO networks designed to benefit health plans, not employers. At the big picture level, PwC has pointed out that more than half of healthcare spending adds no value. At a ground level, we see some employers spending 55% less on health benefits with a benefits package that is better than 99% of the workforce. In other words, the best way to slash healthcare costs is to improve benefits.
Nationally regarded leaders who contribute to The Doctor Weighs In, such as Tom Emerick, Brian Klepper, and Al Lewis, routinely point out the biggest areas where employers are needlessly squandering money. These three are amongst the experts that The Big Heist film team has consulted with to learn where the biggest “heists” are happening in healthcare. [Disclosure: I’m executive producing the film.] We asked them what is the bare minimum that virtually every employer could find in annual recurring savings (while not negatively impacting benefits), they said it is at least $1,500 per employee per year. For this reason, Tom, Brian, and other noted experts have offered up their expertise as a “2nd opinion” on one’s health benefits as part of the crowdfund supporting The Big Heist. See 2nd Opinion on your Health Benefits from the Dream Team of Benefits Experts (scroll down the page to the $1,500 level).
Perfect storm created massive healthcare waste
I can’t imagine anyone ever wanting to create a middle-class economic depression but that’s where we sit today. How did this happen? Naturally, problems this big are multifactorial but the following are some of the key drivers:
- Going back to WWII, health benefits were given tax-advantaged status that created a dynamic where it was “other people’s money” that was being spent.
- From an employer bottom-line perspective, the total amount of health benefits spending was relatively low and viewed like one might look at other corporate perks (i.e., modest scrutiny).
- The message from the CEO to the HR department was mainly “keep those employees” happy. Combine that with HR leaders who are commonly wonderful people but not hardcore negotiators and have been an easy mark for those who wanted healthcare costs to increase just the right amount (as much as possible but not so much it would set off too many alarm bells).
- Health systems have long operated on a cost-plus business. Naturally, this creates a dynamic where there has been relatively little concern for cost controls. The economic incentives of health plans were aligned with wanting to drive up costs. After all, if you are paid a percentage of claims, the best way to increase profits was to increase overall spending.
- Yet another perverse incentive (some would say conflict-of-interest) was that many benefits brokers have been paid a commission. Thus, like health plans, they had a disincentive to have employer healthcare costs under control. Of course, there are many highly ethical benefits consultants who didn’t capitalize on that opportunity for conflict-of-interest, but that is far from being universal.
- Over 20-30 years, the power of the compound interest of healthcare cost growth outpacing regular inflation put it wildly out of whack with any increased value delivered.
- Over time, the industry became very adept at various tricks to redistribute profits from companies into the healthcare system. What that translated to was the redistribution of wealth from the middle class to an under-performing healthcare system.
If fixes already exist, why isn’t everyone using them?
Healthcare’s redemption is a classic example of solutions hidden in plain site. Noted business consultant and author, Ric Merrifield, summed this up during message testing,
“The Big Short, and Moneyball, had one major theme in common—in the face of a mountain of evidence, the evidence was ignored…Wall Street and regulators didn’t downgrade the credit ratings of the mortgage-backed securities even when the mountain of evidence was presented to them. So why should we expect healthcare to be any different? Healthcare is in the same place at the moment. The healthcare mess in many ways is happening in broad daylight.”
Here’s how a leading benefits consultant described it:
“I would, of course, point out how the whole system is incentivized for higher costs. The broker/consultant community has traditionally benefited from that as well. In the past, all plans were commission based, giving their broker a bigger raise the bigger the increase, which I would argue means they did a bad job that year with what should be their #1 goal. They should get a pay decrease if anything, not to mention, carriers often have hidden incentive compensation and bonuses and trips. I would ask CEOs two key questions:
- ‘Do you know exactly how and how much your broker/consultant gets paid?’
- ‘Do you have performance-based incentives that align their incentives with yours around lowering costs?'”
CEO: I won’t let healthcare put my company out of business
This dynamic is changing even more rapidly than I expected. A week doesn’t go by where I don’t get a CEO-awakening story from innovative benefit consultants like David Contorno, Jim Millaway, Keith Robertson, and others. These great benefits consultants have often been encouraging, some or all of the facets of the blueprint for wise healthcare purchasing, for some years but risk-averse HR leaders were reluctant to introduce any change due to the dynamic described above. Suddenly, CEOs (and CFOs) recognize the annual health benefits Kabuki dance is jeopardizing the viability of their business. CEOs are running the numbers and recognize that they are a benefits renewal or two from being put out of business and finally scrutinize healthcare spending like they do any other input.
I recently spoke with John Torinus (Chairman of Serigraph and author of the book, The Company That Solved Healthcare). Torinus described how manufacturers are managing costs two or three points to the right of the decimal point. Meanwhile, they were seeing 100% or more variance in healthcare costs with no correlation to value. In addition to Torinus’ company, CEOs are hearing about employers all over the country who haven’t given in to the tyranny of low expectations and, merely, the hope to slow healthcare costs growth. Rather, they are spending 20-55% less per capita on health benefits with benefits packages that are better than 99% of the workforce. The following is a small sampling of those organizations:
- Small manufacturer in Oklahoma
- Mid-sized town in the Pacific Northwest
- School system in Pennsylvania
- Hotel chain in Florida
- Large city in the Midwest
There are two things that set these organizations apart:
- They didn’t buy into healthcare’s biggest lie—that it’s not possible to control healthcare costs.
- They had the backs of their HR/benefits department. Without the C-suite driving the change, it’s nearly impossible for HR to make much-needed changes.
If your organization hasn’t seen its healthcare costs go down the last few years, there is an increasing likelihood that company officials will face personal liability due to a breach of fiduciary duty. As much as it is appealing to avoid unnecessary overspending on healthcare, fear of an impending lawsuit is an ever-greater motivation for benefits leaders and their consultants. No HR leader or CEO wants to see their name on an ERISA-related lawsuit. This legal risk is what I hear most frequently for jolting companies into action like never before. Fortunately, the best way to avoid that legal risk is to do something that will enrich the employer and employee. Predictably, the only pushback is from healthcare status quo preservationists. Hardly a reason to not take action.