I got a call the other day from a head hunter looking for a new CEO.
“Look, I’m not going to lie to you. Acirema Incorporated is a blue chip firm but it is in deep doo-doo. The succession planning is pretty complicated so they are looking now for a CEO that can take over when the current CEO retires in 2016.”
“It seems sort of far off but okay, what’s the deal?”
“It’s a classic turnaround.” He chirped enthusiastically. “The firm is essentially bankrupt and needs a strategy to get back in the black. The company is spending about a third more than it is generating in revenues. The line of credit with the bank is strained and getting worse as the firm comes close to violating some of the very liberal banking covenants. The expenses are running over from two poorly conceived overseas joint ventures and a debt refinancing that went south. The rest of the money goes to finance active and retiree benefits and pensions, new products, customer services and interest on debt the firm has borrowed.”
His voice got low and he was whispering into the phone. “ I shouldn’t be telling you this but these guys have about an 8:1 debt to earnings ratio – which is alarming – but the bank that holds the debt has given loose terms and has not raised too much concern about the potential for default. Acirema has a problem looming with its pension and retiree medical benefits as the CFO made bad assumptions about how much money they would have in the future to pay for commitments to current and retired workers. Investment yields have been bad and the lower returns mean fewer dollars to pay without dipping into principal. They now realize they made a massive accounting error when they assumed people would draw only three to four years worth of benefits before dying. The average worker is now receiving benefits for almost thirteen years – six times what Acirema budgeted. The new CEO is going to have to fix that.”
“How?” I asked
“That’s why they pay you guys the big bucks, I guess. I’m just a head hunter on a commission.”
He continued having memorized the entire terms of reference. “So, the firm is underfunded in its medical retirement plan to the tune of almost twenty-five times our annual revenues. Management can’t honor these commitments with the union and the new CEO is going to have to break the news to the collectively bargained groups who may threaten to strike. There’s a lot of waste – endless committees and departments. You can work at the firm twenty years and retire and get 90% of your former salary as a pension. You can then come out of retirement and get a new salary AND your pension. It’s crazy.”
“Jesus” I said.
The recruiter laughed. “We wanted to offer him the job but could not find his number. Your two predecessors have really messed things up. Revenues are down and many want to raise the price of company services and cut the stock dividends to shareholders but management is not sure if shareholders will go for it. If they don’t raise revenues, they have to cut dividends deeper and lay off staff. Acirema is heavily unionized and cutting expenses could create huge problems – even an industrial action.
The board of directors is dysfunctional and divided. The truth is they have never made money – only made a profit five times in fifty years – but the firm is deeply respected and has done more to influence our industry in the last two hundred years than any other peer. The board has a low approval rating from our shareholders but they keep reelecting them. We need a Chairman and CEO that can lead.
Shareholders don’t have a realistic understanding of the economics of the industry in which the firm is now entering. The next phase is the proverbial “Fourth Turning” – an unraveling phase that precedes a winter crisis that will eventually open up everyone’s eyes to the need to change. Whoever joins the firm as CEO in 2016 will most likely be grabbing the helm right when the wind is at gale force and the barometer is dropping.”
“Wow, Mrs Lincoln! ” I said sarcastically “Other than that…”
“Here’s the good stuff: The job pays $400k a year plus a $50k expense account. You get to use the corporate house for free and we have a luxurious, multi-acre estate that is available to you for meetings and weekend getaways. You get $200k as an annual lifetime retiree benefit. The firm will give you use of the private jet and helicopter and unlimited vacation – although you will probably never take much.
Now I won’t lie to you. It’s not for everyone. You have to be ideologically strong and determined with the unions, employees, shareholders and the board. Your job is to break up cartels of indecision, pay down the debt, create a blue print for 4% growth and do not let your competitors turn you into a silver medalist role in the industry. It takes guts, charisma and a slightly masochistic personality. What do you say?”
I did not have to think long. “It sounds like a great opportunity but I am not sure anyone could fix that firm.”
He sighed. “Yeah, that’s what everyone else has said. You’re the four hundredth guy in the private sector I have called. No one wants to touch this one. Could you give me any names?”
“Well”, I said. “You need someone who will break eggs and not care about making friends. This requires a benevolent dictator. A “Fourth Turning “ leader is less of a visionary and prophet and more of a commander and tough guy. I’m too empathetic and right brain. You need a Lee Iacocca.”
“Hey, not a bad idea.” The recruiter said. “He’s still kicking, isn’t he. Do you have his cell number?”
As health reform continues to play out across state legislatures and within Washington, employers continue to wrestle with rising costs and the corrosive effects of skyrocketing medical trends. It’s clear that there is enormous variability among employers in their confidence and abilities to identify, mitigate and manage the complexities of the employer sponsored healthcare delivery system.
Many industry pricing and billing practices are opaque. Employers are not always getting good advice and often have to entrust the management and control of employee benefit plans to generalists who do not have the time, resources or ability to engage in managing a corporate expense that has eclipsed a composite average of $11,000 per covered employee.
If employer sponsored healthcare is going to survive to drive market based changes that cut fraud, waste and insist on personal health improvement, corporate decision makers must improve their Medical Quotient (MQ). While larger employers such as Safeway have begun to reap the dividends of lower costs by driving employee health improvement and employee engagement through prevention and chronic illness management, small and mid-sized businesses are increasingly getting failing scores for understanding and managing their own cost drivers.
Success in managing medical costs begins with understanding one’s own MQ and committing to improve it against a rapidly changing market that is exceeding the rate of change of many HR and financial professionals. Jack Welch once commented, “When the rate of change outside an organization exceeds the rate of change within, the end is near.” While ignorance can be bliss, it is an expensive consequence in employer sponsored healthcare. Can HR generalists and less engaged CFOs and CEOs finally grab the horns of their own population health costs and drive toward a healthier tomorrow?
Consider the following as you gauge your own MQ:
1. A Value based plan design:
a) indexes an employee’s maximum out-of-pocket to their gross earnings
b) limits co-pays and out-of-pocket costs for drugs and specific treatment therapies to facilitate chronic condition compliance
c) offers multiple plan design options based on an employee’s gross earnings
d) waives all cost sharing for all benefits to remove barriers to care
e) establishes a fixed fee amount that an employee must pay for every service rendered under a health plan to promote consumerism
2. The American’s With Disabilities Act (ADA) and the Health Insurance Portability and Accountability Act (HIPAA) preclude an employer from:
a) collecting and evaluating (through Human Resources) claims data on each employee and then setting contribution penalties based on chronic conditions
b) collecting and evaluating (through a Third Party) claims data on each employee and then setting contribution incentives based on prevalence of risk factors and compliance with wellness program engagement
c) relegating smokers to a less comprehensive plan design if they refuse to engage in smoking cessation
d) charging up to 30% contribution differentials to those employees or spouse who do not participate in a health risk assessment, biometric testing or general wellness program
3. Match the following percentage of modifiable risks per 100 workers in an employer population:
a) Obese/Overweight 1. 21%
b) Smoking 2. 66%
c) Sedentary Lifestyle/No Exercise 3. 29%
d) Stress/Anxiety/Mental Health 4. 39%
e) High Blood Pressure 5. 33%
4. What did a recent National Business Group on Health survey calculate as the additional percentage of cost increases that unengaged employers are likely to pay for healthcare versus employers who have committed to managing population risk and employee engagement:
e) No difference
5. Match the average percentage of retail charges for medical care that is generally charged by physicians and reimbursed based on the plan payer:
a) Medicare 1. 126%
b) Commercial Insurance 2. 250%
c) Uninsured Consumer 3. 67%
d) Medicaid 4. 84%
6. Match the percentage of your claims dollar attributable to its corresponding category of costs:
a) Facilities – Inpatient & Outpatient 1. 50%
b) Physicians (Primary Care) 2. 12%
c) Prescription Drug 3. 23%
d) Physician (Specialists) 4. 15%
7. According to Compass Consumer Solutions, contracted rates for services can vary by as much as what % within the same approved PPO network?
e) No variation – all contracted rates are consistent between providers
8. In 2014, health insurance exchanges will offer the following:
a) community rated plans that allow for preferred pricing if employers achieve health improvement and lower utilization
b) federal subsidies for all employees who choose to purchase through the exchange
c) access to the Federal Employee Benefit Plan to take advantage of government employee purchasing economics
d) bronze, silver and gold coverage options for consumers and employers under 50 employees seeking to purchase pooled, insured coverage
e) tax credits for employers who choose to drop coverage and subsidize coverage for all employees purchasing through the exchange
9. Under new health reform legislation, an insured employer of 50 or more employees’ individual loss ratio ( claims as a percentage of total premium ) cannot be less than:
e) Loss ratio rules do not apply to each employer, only across insurer books of business by license and by state
(See Answer Key for scores)
A higher MQ means a lower cost – As you tally your scores and ponder the range of questions and answers, understand that a lower MQ is costing you money. If you are relying on a broker or advisor who does not help you understand the increasing complexities of insurer underwriting, network economics and provider contracting, you are not getting full benefit for your advisory spend. It’s not enough to delegate the role of managing plans to a third-party. A high will, but low skill brokerage relationship may have you permanently stuck in remedial Health 101 with no hope of graduating to lower costs.
Employers need to understand an increasingly complex landscape and be capable of deconstructing their healthcare spend. Ignorance literally is costing you money. A higher MQ requires knowledge of: every insurer’s product plan design options, population health management programs, utilization data analytics options, predictive modeling tools that can forecast future utilization trends, options to identify high risk and at risk insureds through biometric testing, clinical outreach programs intended to stimulate engagement, state and federal legislative trends and more cost effective risk financing options such as self insurance. If you have a low MQ, the odds are you are probably paying too much for your risk transfer (insurance) and not enough time on understanding your claims.
The good news is that a low MQ is treatable and that sophisticated solutions are no longer the exclusive domain of the larger employer. In an industry crowded with advisors, there are no bad students, only bad teachers. A good teacher pushes their student out of their comfort zone. In healthcare, a strong advisor forces an employer to understand the difference between change and disruption. For most mid-sized employers, the MQ resources required to properly understand and manage costs do not have to exist within your own organization. They can reside with other knowledge workers – your insurer, your broker/consultant, and third-party vendors who specialize in managing health risk. However, each year, your own understanding of your costs and the industry should be improving. In the end, the investment you make to understand your own corporate health will be paid back through the significant dividends of lower average medical costs and a greater sense of control in a turbulent market.
Answer key and explanation:
1. b Value based designs are intended to improve compliance for at risk and chronically ill employees to ensure stability in those populations and prevent higher rates of catastrophic illness arising out of unstable conditions. A Safeway study revealed a staggering 55% of diagnosed diabetic employees not complying with recommended courses of treatment. Value based designs eliminate financial barriers to care for specific conditions and help remove excuses for chronically ill to remain compliant.
2. a Contrary to those who might use ADA and HIPAA as a reason to not engage in wellness, the legislation affords employers more than enough latitude to gather biometric data through a third party ( you cannot do it yourself ), warehouse aggregated population data through a third-party vendor and evaluate health risk profiles and trends to better understand how to impact your population’s health. You can target smoking cessation, obesity, and a range of lifestyle based behaviors that can give rise to catastrophic or acute episodic claims. This data coupled with additional information gathered through claims reviews and health risk assessments can aid any employer in better structuring incentives for employees to improve health status.
3. a2, b1, c4, d5, e3 Most employers have no line of sight on the risks that exist within their specific population. Many of these risks arise out of modifiable behaviors. An alarming number of catastrophic claimants had not filed a claim in the preceding 24 months prior leading up to their event suggesting that they were not under a physician’s care, not compliant with basic preventive services and/or asymptomatically ill but had not seen a physician in the prior 24 months. An alarming 40% of men over 40 years of age have not seen a primary care provider in the last 24 months.
4. c In 2010, medical trend increases for engaged employers tracked a full 10% less than those of their less committed peers. To put this in perspective, calculate your total medical spend in 2010 for claims and administrative expenses. Now reduce that by 10%. Is this 10% dollar savings worth it to you to begin the process of improving your MQ?
5. a4, b1, c2, d3 As government begins to cut back reimbursements for Medicare and Medicaid, cost shifting to the uninsured and commercial insurance will accelerate. Once the uninsured are covered under PPACA in 2014, employers over 50 lives will be vulnerable to cost shifting and will need to understand the implications of this commercial pricing shift to avoid subsidizing the major shifts in healthcare reimbursement
6. a1, b2, c4, d3 Employers need to understand where services are being delivered to employees. A simple access shift such as reducing emergency room visits, expanding the use of primary care providers, using soft steerage techniques to guide employees to lower cost, equal quality outpatient care centers can save as much as 15% of one’s medical spend. This savings could be equivalent to the entire administrative spend an employer may make in a year! Loss control and financial management begin with understanding where care is most cost effectively delivered and creating incentives to access the system through these points of entry.
7. b Most employers do not realize the difference in pricing for the same procedures within their own preferred provider network. There is a significant cost an employer bears by insisting on the broadest networks and open access PPOs. Insurer negotiated fee for service discounts do not eliminate the significant variability in charges from one hospital or provider to another. Employers must possess better consumer engagement tools and create financial incentives for people to choose higher quality, lower cost providers or you will end up paying dearly for the cost of your ignorance.
8. d Sadly, health insurance exchanges will not offer significant flexibility or reduced premiums to employers over 50 employees in 2014. In many states, exchanges will not even be available until 2017 for larger employers. The exchanges will be required to engage tight community rating rules limiting the benefits an engaged employer might receive over a less healthy employer. Additionally, a surge in previously uninsured participants covered under expanded Medicaid coverage could lead to a less than desirable risk pool as chronically ill individuals, now covered under Medicaid, seek care through emergency rooms – unable to find providers willing to accept Medicaid.
Regulators will work to control proposed insurer increases with price controls on renewals but these will only serve as stop-gap measures. Employers with over 50 covered insureds need to understand reform was designed to expand coverage for the uninsured and to facilitate aggregated purchasing for individuals and small employers. As insurers lose the ability to make higher margins on smaller business, costs will move to insured employers over 50 lives who will continue to procure healthcare outside exchanges.
9. e Minimum Loss Ratios will be calculated by each insurer – by license and by line of business in each state. Employers may still experience low loss ratios but be underwritten in such a manner that they may receive higher rate increases. Pooled insurance will continue to cost shift from bad risks to good risks. This will drive smaller employers to begin to consider self funding risks to avoid state mandates, premium taxes, insured pooled underwriting cost shifting and limited line of sight on one’s own claims experience.
17-20 points – Valedictorian – You understand the issues. You should be achieving low, single digit trends
14-17 points – Honors – You know what you don’t know. Now do something about it
10-14 points – Passing – You still have a lot to learn. Ask for help.
< 10 Points – Remedial – You may need to repeat another year of high increases