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Managing Rising Health Care Costs: You're Your Own Best Resource
By Ed Murphy
Universal Advisor, 2006 Issue No. 1
Everywhere we turn, people are being asked to do more with less. Health care is no exception. The market is driven by many different stakeholders: providers (hospitals/physicians), payers (insurance carriers and network managers, such as Blue Cross, Humana, CIGNA, United HealthCare, and Aetna), and plan participants (employees, dependents, and/or retirees). Although each tries to best manage its own costs, together they’re often viewed as pulling at opposite ends of the rope.
Effectively managing your employee benefits requires more discipline and personal/organizational responsibility than it has
in the past. Put simply, three things control an employer’s and employee’s health care cost. They are:
- Average price per unit of service
- Number of units of service consumed
- Quality/Efficiency of services provided
In a day and age where business margins are slim, markets are competitive, and profits are often elusive, optimizing the management of resources, capital, and labor is vital to the success of an organization. Here are a few suggestions to help you effectively manage yours.
Supply-Side Management
Vendor management is a supplyside management technique that
requires diligence each and every year if you are to optimize your purchasing. It doesn’t mean always getting the lowest price for every single component of service that you purchase. Rather, it means you get the greatest value for the services you need. Therefore, we suggest that any vendor management effort begin by outlining a checklist of these necessary services, including:
- Plan Administration — includes monthly eligibility, reporting, claims services, and customer service.
- Pooling or Stop-loss Premium — insurance or re-insurance for claims over a predetermined amount.
- PPO Network Management Fees — fixed fees, often per employee per month, that allow access to a discounted network of hospitals and physicians.
- Commissions — the amount paid directly to an independent agent or broker for the ongoing support services to the organization and/or employees.
It’s important that all organizations evaluate their plans every year. For instance, just because the cost of your overall health plan is increasing by 10 to 12 percent, it doesn’t mean that your insurance carrier’s administrative fees should go up by that same amount. Administrative fees easily account for 15 to 20 percent of your total health care spending. Each year a carrier should improve its administrative services such that its unit cost of administration actually decreases. This means that they should be doing more with less as well.
Hold the carrier or administrator accountable for improvements in administrative services. Take advantage of web-based technologies, which often reduce the internal resources you need to manage the plan. As such, carrier/administrator-based technology improvements should translate to higher productivity for your organization.
Another strategy to consider is the number of plans you offer. Many carrier and provider networks have become relatively homogenous. Therefore, you may find that one carrier network has 80 percent or more of the providers that are offered by another carrier network. Consolidating to a single carrier network may eliminate work associated with multiple carriers and may provide you with a “bargaining chip” at renewal time.
We view these supply-side management techniques as “radical incrementalism,” since attention to detail allows for incremental cost improvement. Rest assured, over time, the nickels and dimes do make a difference.
Demand-Side Management
Demand management strategies address consumption, quality, and
efficiency of services delivered. Given that these pricing elements are less defined, an effective demand management strategy requires more diligence and direction of effort focused on behavior change — by both the purchaser and provider of the health care services.
The following chart illustrates the potential advantages of supply-side management versus demand-side management. As you can see, health status and, therefore, cost management, is greatest when you change behavior.
Behavior can be influenced in the following ways:
- Redesigning your medical plan to include financial incentives and disincentives to seeking care through various care providers (for example, higher deductible/copay for emergency room treatment)
- Offering employees incentives for participation in programs that foster healthy lifestyles, such as completion of a health risk analysis, smoking cessation programs, medical screening for high blood pressure/diabetes/high cholesterol, and exercise programs
- Seeking guidance of a 24-hour nurse advice line before rushing off to the emergency room
- Implementing a Health Reimbursement Account or Health Savings Accountbased plan
- Implementing High Performance Network-based plans, which provide higher reimbursement if certain hospitals and/or physicians are used because they’ve been determined to provide higher quality and more efficient care
- Researching participant claims to determine the most prevalent medical conditions and magnitude of each so that targeted disease and health management programs can be implemented
- Employee communication and education on more effective ways to access and receive health care
Recent quantitative and qualitative analysis demonstrates that
comprehensive and coordinated demand-side management lowers service utilization and improves medical outcomes. The key is focused, coordinated initiatives coupled with consumer education and accountability — in short, consumers must have a stake in the outcome.
This Is Not a One-Time Event
The best way to get started is to meet with your benefit plan advisor, outline a plan that addresses each of the strategies outlined in this article, prioritize which offers the greatest potential for return on investment, and begin research six to nine months in advance of your next renewal. And remember — getting more out of your plan, and vendors, is an ongoing task, not a one-time event. Research needs to be ongoing, and behavior change takes time. In the end, you’re your own best resource. The combination of supply and demand management techniques requires participation by your staff, your vendors and, most importantly, your employees. Only then can you effectively optimize your health care resources.
How We Helped
In a recent project, we were working with a client that offered five different HMOs to its employees in Southeast Michigan. By consolidating the number of carriers from five to three, the client reduced its outsourcing administrative support costs (dealing with
three carriers is cheaper than dealing with five carriers) and was able to negotiate price concessions form the surviving HMOs. More
importantly, by making the HMOs effectively “compete for the renewal business,” we were able to negotiate renewal increases down from a starting point of approximately 9 percent on average to an increase of approximately 3.5 percent overall. It was a win-win
situation. Each HMO increased in membership and, therefore, lowered the renewal premiums to reflect the better overall spread risk of the group, and the employer and employees received lower premiums, resulting in decreased employee contributions.
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