ACA 101: Hammers. Nails and An Employer’s Search for Objective Advice

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In ancient Athens, the philosopher Diogenes wandered the daylight markets holding a lantern, looking for what he termed, “an honest man.” It seems since the dawn of the consumer economy that customers and buyers have traded most heavily on a single currency – trust. Three millennia later, our financial system still hinges on the basic premise that the game is not rigged and any trusted intermediary is defined by a practitioner who puts his client’s interests ahead of his own.

Anyone responsible for procurement of healthcare may feel like a modern-day Diogenes as they wander an increasingly complex market in search of transparent partners and aligned interests. The art of managing medical costs will continue to be a zero-sum game where higher profit margins are achieved at the expense of uninformed purchasers. It’s often in the shadowed areas of rules-based regulation and in between the fine print of complex financial arrangements that higher profits are made. Are employers too disengaged and outmatched to manage their healthcare expenditures? Are the myriad intermediaries that serve as their sentinels, administrators and care managers benefiting or getting hurt by our current system’s lack of transparency and its deficit of information?

Who’s to Blame for the Failure to Rein In Healthcare Costs?

In his recent column “Yes, Employers Are To Blame for Our High Medical Prices,” Princeton political economist Uwe Reinhardt controversially lays partial blame for the healthcare cost crisis at the feet of employers. Reinhardt suggests that some employers have been passive, uninformed and in some cases, unable to muster the internal energy to get their own leadership teams to commit time to becoming more informed purchasers of health services. Where corporate procurement might realize aggressive discounts from vendors, healthcare has remained outsourced to insurers who have been largely unsuccessful in controlling rising costs and conflicts of interest.

Poor procurement arises out of a failure to act properly – to be informed, to be prepared and to ask the right questions. Some critics of our broken system complain that employers are simply getting poor advice from consultants, agents and brokers who often move at the speed of disruption-averse clients. Some point to government for public-to-private cost-shifting, poorly conceived legislation, and poor regulatory oversight over an industry that has witnessed the rapid consolidation of hospitals and insurers into an oligopoly of control that is difficult to deconstruct.

As the next phases of reform plays out across public and commercial markets, unintended consequences, odd alliances and new conflicts of interest will arise out of the ground fog of purchasing choices. Employers without a firm grasp of the key elements of healthcare cost-management are likely to fall prey to flavor-of-the-month stop gap solutions or Trojan Horse cost-shifting schemes that may control employer costs but will do little to ameliorate underlying negative trends.

Will Self-Centered Fear Reveal the Worst of the Industry?

Healthcare industry stakeholders are scrambling to remain relevant as the locomotive of Obamacare leaves the station. Players once considered essential stewards and stations along the tracks to controlling healthcare costs are worried that they may soon be bypassed. Disintermediation is weighing heavily on anyone who sits in between those that deliver care and those who consume it. The national vision seems clear: universally affordable health coverage leading to lower costs for both the private and public sectors. And while we are at it, let’s toss in a free flat-screen TV.

Employers are naturally cynical to the legislative complexities of the ACA and are having a tough time trying to figure out how to use the momentum of health care reform to make changes that will insulate them from future cost increases. But, it’s hard to know which direction to go – especially when opinions diverge around the likelihood that market-based reforms can lead to sustained low single-digit medical trend. It’s getting hard to know whose opinion to believe, and worse yet, what is motivating their point of view.

The anxiety around disintermediation is causing many stakeholders to explore how to move up and down the services value chain in an effort to carve out a permanent role as a participant in the new age of healthcare delivery. In doing so, many firms are discovering inherent channel conflicts and developing facilities that may cannibalize their own existing business models to survive the digital transformation of an analog industry.

If we believe that any 2.0 version of a solution should be better, faster and cheaper, we should be excited about the changes that lay ahead. The challenge for employers will be to see through to the institutional incentives that are causing many players to pivot into new business models – consultants selling products, hospitals selling insurance, insurance companies becoming providers, and employees being asked to become consumers. Just how muddy is the water getting? Consider the following positions.

Hospitals

As inpatient admissions continue to decline and larger healthcare systems find themselves burdened with brick-and-mortar overhead and high unit costs, there is pressure to continue to pivot into integrated health delivery and higher volumes of ambulatory and outpatient services. So far, so good.

With healthcare reform, these same hospitals are being encouraged to form risk-bearing Accountable Care Organizations (ACO) to help manage population health of retirees and share in the subsequent savings that could be achieved by focusing on value instead of volume. It seems an easy jump to turn an ACO into a commercial venture offering employers the ability to contract directly with the large hospital system as their medical home – essentially becoming an HMO, bearing risk for the health of its members. Incentives change from treating illness to keeping people healthy. The big problem is most of the hospital systems putting their toe in the water of these risk arrangements are also the most expensive hospitals in any PPO network.

Will these hospitals be able to achieve competitive unit cost and low year-on-year trend increases, or will they simply reduce some cost by disintermediating insurers but continue to charge higher costs for services? Once risk shifts to integrated healthcare delivery systems, expect more liability arising out of alleged conflicts of interest and rationing of care.

Insurers

Many argue that insurers, not unlike banks, have become highly risk averse and are rapidly moving toward a new role as health service and technology infrastructure providers. Most insurers have failed to become trusted consumer brands. Much of this distrust is arguably deserved given their historic insensitivities to customer service and business practices that left purchasers unable to decipher the complex and seemingly arbitrary calculus of pricing and claims payment policies. Most small and mid-sized employer renewals have become frustrating annual rites of passage.

Truth be told, most fully insured employers are beginning to understand that healthcare is like a Las Vegas casino – if you play long enough, the House always wins. The deck is further stacked against business as employers are often scared away from more efficient financing methods like self-insurance to fully insured, bundled programs where all health services are provided through a single insurer including RX, behavioral health, chiropractic and radiology. Bundling affords insurers ample pricing mobility to move required margins across a range of services to achieve their profit targets. While there is nothing illegal with these business practices, it does give rise to healthy cynicism regarding the industry’s commitment to achieve affordable care over personal profit. As one healthcare executive commented, “Look, our job is to hide the Easter eggs and your job (as an advisor) is to find them.”

Public managed care stocks are enjoying 52-week highs as Wall Street clearly sees no signs of near-term pricing pressure. Optically, the new insurer business model, which is now expanding into Medicaid and Medicare, gives the appearance that insurance firms are operating at lower margins while their health service subsidiaries report record growth and profit. It’s hard to trust a vendor who is both serving clients as claim payer and providing services through a subsidiary for undisclosed transfer pricing. This practice will give rise to conflicts of interest as payers pivot into providing care.

Consultants

Large consulting firms have long-since laid claim to the high ground of objective employer advocacy. As retiree medical and RX costs began to balloon in the late 2000’s, consulting firms saw value in carving out elements of these costs from insurers — creating owned and managed facilities to purchase drugs and offer defined contribution retiree exchanges. A rush of mergers and consolidations introduced additional services to traditional Human Resource and Employee Benefits consultants offering outsourced administration and defined contribution exchanges for active employees. The success of these first-generation facilities led to higher margin annualized revenue streams and a pressure to expand proprietary product solutions into a culture that had historically been agnostic to solutions and vendors.

As employers express interest in exchanges and alternative delivery models, consulting firms see an opportunity to leverage their trusted relationships to steer clients to owned and operated facilities. While clearly believing their owned solutions offer a better mousetrap, the fee for service consulting community is now confronted with a business model conundrum. Do we create products and proprietary facilities to meet the profitable and growing demand for administration and service platforms? If so, will our own consultants consent to steering our customers to our own facilities?

To add additional pressure, Wall Street has rewarded public consulting firms and defined contribution/benefits administration companies with generous valuation uplifts – increases in market cap well ahead of actual enrollment, creating internal pressure to promote exchange participation to deliver on analyst expectations. Certain analysts are convinced that the majority of large employers will convert to exchange-based purchasing in the next decade and in doing so, they are seeking to invest in firms that seem positioned for these future purchasing trends.

The administrative services that accompany many proprietary online enrollment platforms will benefit exchange managers, creating almost captive relationships as employers see higher frictional costs moving from one exchange to another. Employers may essentially be stuck paying annual administration and commissions as part of an exchange-based relationship. Where a consultant should play the role of trusted advisor to help choose the exchange that is best for their client, firms will now be pushing their people to endorse their own exchanges, and in some cases, promote financing arrangements that defy decades of empirical data — in particular those exchanges that are encouraging employers to convert from self-insurance back to fully insured financing as a means to promote purer competition between carriers. Befuddled HR professionals are increasingly torn between long-term institutional relationships and a nagging suspicion that their consultant is now promoting a model out of self-interest. Now armed with hammers, it appears that every client is beginning to go look like a nail.

Brokers/Agents

Brokers and agents have long enjoyed a too-cozy rapport with their HR and Benefits counterparts in small and mid-cap America. In the world of middle-market brokerage, generalists are often advising generalists and relationships routinely trump fiduciary accountability. Brokers leverage relationship-based trust and are often heavily influenced by how they are remunerated. Some brokers prefer fully insured plans as administrative costs, taxes, fees and commissions are commingled and not as visible to a cursory review of costs. One could argue that commissions by their very nature create conflict of interest. The continued practice of volume and contingent-based bonus payments also clouds the broker’s ability to claim total objectivity.

Most relationship-based employers do not question or understand their broker’s remuneration arrangement or in some cases, may knowingly pay higher commissions to their broker so the broker might serve as an outsourced benefits staff – using headcount that HR could never successfully justify internally because of finance and staffing controls.

Healthcare 2.0 will be characterized by data – lots of data and an increased dependence on compliance and technical resources that will shake the traditional transactional broker profit model to its core. Informed clients will desire transparency and accountability for all services, and judge value based on a numerator of outcomes divided by a denominator of cost of services. Brokers will need to be able to demonstrate actionable interventions, improve clinical trends, assist with optimal financing arrangements (including actuarial support for plan value-setting and financial forecasting), provide strong communications and HR support for concierge and employee engagement tools, and understand healthcare economics expertise to hold insurers accountable for achieving network discounts while limiting hidden margins and fees. Transactional placement skills will be table stakes as the 2.0 broker reinvents themselves as a solutions provider with no embedded conflicts of interest. The big question remains: Is it possible for the broker’s goals to align completely with the client’s goals?

Human Resources

A Human Resources manager facetiously shared with me, “I got into the business because I really liked people and I hated math. I now spend my days with a calculator trying manage a massive human capital spend and I don’t really like people.” If you watch where most HR and Benefits Managers’ feet go, it is not in the direction of disruption and greater intervention into the personal and consumer healthcare habits of employees. America’s C Suite has been surprisingly unwilling to spend the time with HR to understand the root causes of their healthcare costs and instead condones what is now a regular and unimaginative annual cost-containment exercise of cutting benefits and increasing contributions as a means to achieve a workable healthcare renewal price point.

While Professor Reinhart’s gentle rebuke of HR may have been a bit undeserved, it is not completely without merit. Structure has long since trumped strategy in employer healthcare plan management. A good renewal sees very little changing, when in fact, change must occur if behavior is going to change. “Disruption” is a broad, amorphous HR term used to describe anything that creates additional work in the form of employee complaints and additional distractions from the job of doing one’s job. To avoid the steeper slopes of the healthcare cost-containment mountain, those charged with overseeing Human Capital have travelled the easier, well-trod trails of cost-shifting, resulting in the erosion of take-home pay.

Given that 90% or more of America’s HR and Benefits professionals are responsible for healthcare but are not rewarded for delivering low, single-digit medical trend, it’s no wonder that their focus is on where they do get rewarded – limiting noise, smoothing feathers and keeping the planes and trains of human capital running on time.

One HR Manager related, “It’s hard to get management to focus on the complexities of healthcare spend. They want to see the year-over-year costs and whether their doctor is still in the PPO network. They don’t have the attention span or interest in tackling all these issues.” Sound familiar?

So Who Can An Employer Trust?

Trust and transparency must be the currency that anchors the employee benefits marketplace of tomorrow. No one in a corporate HR and Benefits role can afford to be seen as a friend and not be seen as a fiduciary. Stakeholders – insurers, consultants, brokers, providers – are all scrambling to preserve their roles as trusted B2B advisors while nervously anticipating a growing consumer market. While public exchanges limp along and blue states and red states fight over the notion that reform is succeeding, employers will be on their own for the foreseeable future – forced to revisit their vision, strategy and structure for healthcare and benefits. In the end, it’s all about aligning incentives. If a CEO tells his/her HR team that 2015 bonuses hinge on managing medical costs to a 3% trend or less – without raising contributions or reducing benefits – one wonders whether friends will become overnight fiduciaries.

In the months and years ahead, employers will find themselves wandering among the tall trees of monolithic insurers and a dizzying new roster of online and consumer engagement tools. It will be all about alignment of interests and holding people accountable for results – not bedside manner. Purchasing will require a lot of homework, faith and a strong sense of the corporate values of the partners you choose to help you shape your plans.

If ever there was a time for honest, unfiltered advice, it’s now. The search is on for affordable healthcare and for stakeholders who are beholding only to their client’s interests to get costs under control

The Great Wellness Revolt of 2011

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The scene opens with a fit, thirty-something man running down the hallway of an office building.  His white shirt is stained on right side by what appears to be orange juice. He frantically looks behind him to see if anyone is following him and knocks over a female colleague – spraying papers into the air.  He spins, tumbles, hesitates and then runs through a door marked, “ Human Resources – Compensation and Benefits”

He bursts into an inner office where a 50ish woman is on the phone – laughing.  She frowns glancing at him as he shuts the door and peers between her Levolor blinds.

Carol: (Covering the phone) What the hell are you doing, Johnson ?  Aren’t you supposed to be downstairs conducting the annual benefit enrollment meetings?

Johnson (Terrified, turning to show his stained shirt) : Are they coming?  Did you see anyone?  Those five women – you know the ones who go walking every day at lunch – one of them threw an orange at me right in the middle of my presentation.

Carol: (Swivels in her chair, turning her back on Johnson and is about to speak into the phone when she sees all her phone console lines blinking at once. Her cell phone begins to vibrate in her purse. She speaks into the phone)

Tim, let me get back to you.  Something seems to be going on here at Corporate. (she hangs up and let’s her phone start to ring. )

Cindy grab those calls will you?  (she glances at her cell and sees it is her West Coast HR representative. She holds up her hand to Johnson who is about to say something) Shhh! I have to take this cell call. (She answers the cell)

Phil, I hope this can wait.  I have a …..

( She listens intently as a barely audible voice is whispering on the other line )

Phil, I can barely hear you.  (frowning again) You’re where?  The women’s bathroom – – in a stall?  Phil, I don’t need to tell you that.  What?  Who is after you?  Well, did you call security?  What do you mean, the elevator is not working? The security guard says it’s too far to climb eight flights of stairs?

(She listens and stands up.  She looks out her front window and notices that several employees in suits are doing push ups and jumping jacks in the parking lot.  There are signs being removed from the back of a truck that read, “ Lower Your Cholesterol, Lower My Cost for Health Insurance”, “ That Donut You’re Eating Just Cost Me $50.00”, and “Cut Your Risk Factors, Not My Benefits.”

What the hell is going on?   What?  No Phil, I was not talking to you.  What happened? At your enrollment meeting? Flesh mob? Flash Mob? What did you….Vending machines?  A glasscutter?….Only the candy bars and chips? Apples?  How the hell did someone smuggle 500 apples into the office without us seeing them? Every desk? What?  ‘An apple a day, keeps your colon okay?” Who the hell wrote that?

A flustered secretary opens the door and Johnson hides under her desk with his butt sticking out of the narrow opening.  Carol looks down and barks.

Johnson, for God’s sake get out from underneath that desk.  Cindy, WHAT IS IT? “

Cindy (talking very quickly): Every HR representative is calling from the field.  Apparently, during the open enrollment session this morning, there was a coordinated protest over our raising premiums and decreasing benefits. Several people removed their business suits and were wearing workout clothes.  They started exercising and chanting inappropriate slogans about how this company does not care about employee healthcare.  Someone turned over all the vending machines in St Louis.  A group of CSRs in Dayton who conduct Zumba classes every day at noon have demanded that we do biometric testing on all the people working in the call center.  They seem to have somehow figured out that all of our big medical claims came from several people who have not seen the doctor in years.”

Carol looks out the window and sees an overweight security guard trying to take a sign away from a younger, much thinner man in a track-suit.  The young man is taunting the guard and running just ahead of him until the guard stops and places both hands on his knees and throws up.

Carol (talking to herself): This is getting out of hand. Ok, has anyone been hurt?

Johnson ( muffled, still under the desk ): I told you that this was a problem.  I told you.  Just look at Safeway.  They found that 66% of their diabetics were not compliant with their own treatment regimens. They cut premiums for people who engage. raising premiums for people who refuse to make lifestyle changes. Driving employee engagement.  Remember that note I brought you that someone had left next to all those cookies in the lunchroom? It was a warning from this, whatever they call themselves – wellness terrorist group.  It said, “If your LDL is over 130, don’t even think about it.” Remember, you thought it was some kind of a joke?  Well, what about the sticky note on Larry’s (the CFO’s) door: “Dear Larry, ever thought about the relationship between a lap band operation and operating income?”  Think about it, Ms. Whiffler. It all makes sense. This is a wellness rebellion!

Carol: (disgusted) Get a hold of yourself, Johnson.  This is not the Russian Revolution.  It’s a coup of those exercise nuts we see running and walking every day.  They are trying to get us to spend a lot of time and energy on something that can’t be proven to show an adequate return on investment.  I mean have you seen the call center staff in New Hampshire? Do you really think we are going to change these people’s lifestyles and get them to stop smoking and overeating? Have you ever seen what happens when we put any free food in that lunch room?  I mean I could put dog dirt on that table and if it said ”free”, someone would eat it.

(Carol suddenly remembers the king-sized Butterfinger bar she has in her desk drawer. She sighs and thinks: what I would not give to eat that baby and take a nap. The phone rings.  Cindy looks at the console.  She glances up)

Cindy: It’s Mr. Lawson on line one (the Chief Financial Officer )

Carol: Ok, nobody panic. (looks at Johnson and hisses ) and no more talk about fitness mutinies and exercise insurrections. (Picks up the phone and composes herself) Hi, Larry.  What can I do for you?  (A loud voice penetrates the entire office out of the handset) What? Oh my. Well, yes, I….No, I did not know someone left that note on your door until a few days ago.  What?  What did this one say? (she stops and tries to suppress a smile) A manatee? Oh, yes, now I remember – the large, endangered mammals in Florida?…..No, I do not think they were threatening you by choosing to compare you to an endangered species…..Absolutely, we will fire the person on sight if we can find them. Yes, yes, ok…I will circle back to you in a few hours.  We seem to have some issues with the employees around the benefit plan cuts and premium increases.  (more yelling)

Yes, I think they understand we have a new private equity owner who expects us to improve earnings. Yes, better cutting benefits and increasing contributions than reducing the workforce.  No, I don’t think they know how thankless our jobs are. (She glances at Johnson who has now emerged from under the desk. He is rolling his eyes and sticking his finger down his throat and pretending to gag. She gives him a sharp disapproving look. ) Yes, yes, right away.

Johnson: You know he could stand to lose about 50 lbs. I bet he thinks BMI is a kind of foreign car and that a Statin is a Borough of Manhattan. He’s the one who stopped us from reducing the PPO network and implementing some of those changes that would have redirected people to lower cost, higher quality hospitals – all because his doctor was not in the narrower network.

Carol looks out the window.  Over 50 people are engaged in an impromptu Zumba class.  Three overweight security guards are seated watching them in a golf cart.  One is drinking a Coke and smoking.

Carol: Well, he is the boss.

Johnson: Yes, a boss that dropped on our heads like a 300 lb wrecking ball.

Well, boss, what are you proposing we tell everybody around the country?   We have HR reps hiding in bathrooms. The “Fitness Taliban” in control of a half a dozen offices. I can count the lawsuits now from our overweight employees claiming a hostile work environment. (Imitating Keifer Sutherland’s character Jack Bauer  in “24” ) Well, Madam President, what is our next move? Your team is awaiting further instructions.

( Silence. Johnson continues) You know, if we had just dug in our trainers around biometric testing, penalties for smoking, incentives for wellness and compliance based rewards to make sure people adhere to their chronic illness medications, we could have prevented this mutiny.

Carol: (Irritated) Quit using that word.  Who the hell is going to do all this testing and keeping track? You?  Me? We just fired four HR reps. We have cut our budget and we now have the lowest ratio of HR/Benefits staff to employees in our industry.  The sad truth is, Johnson, it’s easier to pay the increased costs and then pass them on to all employees then try to get them to change.  We are in the business of selling HR and payroll administration systems, not the business of trying to get someone’s spouse from eating Oreos.

Johnson: Well, I’m telling you that our costs have increased 50% in the last three years and we have passed on 80% of those increases to our people.  Wages have increased by about 12% in that same period.  My guess is most people’s take home pay has been consumed by our new high deductible plans, increased cost sharing and new drug plan formulary.  They are pissed off.

Carol: So, what do you propose, Mr Bleeding Heart?

Johnson: Actually, my heart is in great shape. Cholesterol? 145.  Triglycerides? 110. Fasting glucose ? Less than 80. I run three days a week and I have given up dairy. Cherie (his girlfriend ) has just turned vegan.

Carol: ( Rolling her eyes) You sound like one of those P90X terrorists.

Johnson: Well, if the shoe doesn’t fit, then you can’t wear it. Look, I say, we immediately circle back to all employees and tell them that we have heard them.  We can easily launch a voluntary biometric plan for our renewal and offer to hold premiums flat for those who participate.  For those who choose to not get tested, they will pay the increased cost of coverage.

We can get our insurer to pay for the testing and use the penalties to offset the partial costs of the increase.  We then meet with Larry and Ron (the CEO) and show them a five-year pro forma of our current medical trends and the impact of us reducing medical trends by 3% each year. Those guys understand profits.  Every dollar saved times a 10X multiple is money in their pocket when we go public.

We pay over $ 15mm in claims.  The savings of a lower compounded medical trend, reduced catastrophic claims, improved productivity and morale will more than make up for the “hassle factor.” Quite frankly, those that consider healthy living an imposition are probably the same ones back at their desks today eating Krispy Kremes while the healthy employees are protesting. If we can just find people who are sick and don’t know it and stabilize those that are chronically ill by reducing financial, physical or mental barriers to care, we would be a great shape. (He smiles) No pun intended.

Think about how we nickel and dime our people on travel and other administrative costs, yet we completely ignore these rising costs because we find it easier and less “disruptive” just pass to them on to the employees.  Well, guess what?  They are telling us, enough is enough.  We have to do something different and be more responsible.  You cannot engage employees if your management is not engaged.

Carol: (looking out the window.  One of the security guards has joined the Zumba class while the other two have left the parking lot on foot leaving the golf cart behind) Okay, call all the reps and let’s have an emergency follow-up meeting this afternoon.  Dust off that proposal from the insurer and our broker and let’s put some numbers around it.

Johnson smiles approvingly and leaves her office.  She shuts the door and falls back into her chair.  A button pops off her blouse and she shakes her head, feeling sorry for herself.  She remembers the Butterfinger and opens the drawer.  She glances at it and then picks it up.  She stands and goes to the window. She tears open the wrapper.

She turns and decisively walks out to her secretary’s desk.  She drops the candy bar in the waste can.

Cindy, hold my calls. I’m going outside to do some Zumba.

Is Your Lack of “MQ” Costing You Money ?

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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:

a) 2%

b) 5%

c) 10%

d) 20%

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?

a) 15%

b) 300%

c) 75%

d) 1000%

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:

a) 80%

b) 85%

c) 75%

d) 90%

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

High Stakes Health Reform – Employers: In or Out?

poker

It’s high noon for private healthcare. Over the last decade, large, medium and small employers that procure and manage over $1T of private healthcare spend for an estimated 180M Americans have been engaged in an expensive game of Texas Hold ‘Em – – wagering with and against a continuum of stakeholders that all seem to possess more powerful hands. As providers consolidate, insurers retrench and the government wrestles with obligations of an uncontrolled fee for service Medicare, the costs of staying at the final table are taking its toll.

To many veteran observers, it appears that employers may be on the brink of folding their cards. As finance and HR professionals consider the table stakes and costs to remain in the game, the Affordable Care Act (ACA) has suddenly provided a potential golden opportunity to step away from a fifty year obligation without incurring onerous near term financial consequences.

As individuals and small business have continued to lapse into the ranks of the uninsured, those small and mid-sized businesses choosing to continue to offer health insurance are coming to the realization that the Affordable Care Act will not result in the moderating of double digit medical trends. In the near term, some contend costs will continue to rise by much as 25-40% before the launch of 2014’s guarantee issue health exchanges.

Larger employers are already cynical to whether reform will actually work for them or against them. Bigger firms and collectively bargained plans are beginning to understand that if small and mid-sized employers drop out of offering private healthcare, the decline of employer plans will leave them as the sole remaining source for private insurance cost shifting. As the cards are turned, the outcomes are far from certain – – and as we have come to discover, business hates uncertainty.

A skilled poker player can recognize the ”tells” of players attempting to buy time or bluff in hopes of seeing another turn of the ACA river card. One can almost hear the private sector thinking: “Do I drop my insurance and pay a penalty that is considerably less than my current financial obligations to provide care?” “Do I keep providing coverage and hope that public policy changes drive improved quality and price controls that will get my costs under control?” “What if the GOP wins in 2012?” “What if Obama gets reelected?” Do I really think the $ 2000 penalty for failure to cover my employees will stay at $2,000 if costs skyrocket?” ”Do I wait and see what others at the table do not wanting to be the first to fold?” “How in the hell did I get into this game in the first place?”

It’s even odds at best when predicting how employers are likely to respond to ACA. What was once considered unthinkable – severing the social contract of providing healthcare to one’s employees – is now not only under serious consideration, but is enabled by a series of intended and unintended consequences resulting from the passage of health reform. Consider some of the emerging fact patterns:

 1) The Social Contract of Healthcare Has Changed under ACA– The Affordable Care Act has mandated that insurance offered through exchanges is “guarantee issue” – eliminating the potential for anyone with a pre-existing condition to be denied coverage or be “rated up” for health status. Historically, employers have worked hard to honor the implied social contract that employer sponsored benefits forged with their employees – – a contract that ensured that an individual would be offered guarantee issue coverage as part of a group purchasing arrangement.

The value of guarantee issue employee coverage coupled with the favorable tax treatment of sponsored benefits has maintained a private sector incentive to use healthcare as a tool to attract and retain employees. Employers are stepping back from this assumption as they consider costs, possible changes in tax treatment and the safety net of exchanges. Some may no longer feel the intrinsic value of offering coverage is worth the potential risk of continuing to provide it – particularly if escalating premiums and public to private cost shifting threaten to further erode earnings.

2) The Culture of American Business Has Changed – It seems less and less relevant whether a business is public or private. The nature of the US workforce and the firms that employ them have changed since the grey flannel days of the career employee. Public firms live quarter to quarter and an increasing number of private firms are either owned or operated by those seeking greater returns on private equity. Businesses are struggling to balance a desire to create long-term value and the very real pressures of an uncertain domestic and global economy.

The notion of investing in employee health improvement plans that may not fully yield returns for two to three years is an unattractive proposition for financial professionals dealing with the need for more immediate financial synergies. The burden of healthcare is weighing on employers and they are doing the math. If penalties for dropping coverage create an opportunity to arbitrage the cost of healthcare, firms could see a net windfall of as much $ 2,000 – $5,000 per employee. This savings expressed as additional earnings per share or as a multiple of earnings is too attractive to not consider as employers push for cost savings and higher EBITDA. As the average American now works for eight different employers over the course of one’s professional life, traditional incentives to create longer term employment such as defined benefit pension, plans, retiree medical and rich employee benefit plans are disappearing – – unless explicitly negotiated as part of a collective bargaining agreement. Employers are asking the difficult question– “would employees rather have a job or healthcare?”

3) Small and Mid-Sized Employers Don’t Manage Healthcare As A Business Risk – Employers have spent too much time looking at healthcare as an expense and not as a business risk. Any effective risk management process first focuses on identifying all the factors driving losses. As data reveals unique risk patterns, the risk manager seeks ways to eliminate or mitigate risk, models scenarios for retaining risk and assesses the most cost-effective way to finance their risk. Ultimately, risk transfer in the form of insurance is the last step an employer employs. The more risk an employer retains, the more they seem to understand the correlation between loss control and loss ratios.

Too often, health insurance is managed as an annual marketing (risk transfer) exercise with little time dedicated to the initial steps designed to diagnose and reduce underlying cost drivers. Since 80% of all group healthcare expenses arise from medical claims and at least 60% of these claims are related to modifiable health risks, one would think employers would see the value in employing more resources to impact and understand these major costs. It seems many firms lack the will, resources or energy to intervene in employee and dependent health and lifestyle. The consequences of this failure to intervene are self-evident in the escalating rates of obesity, lack of compliance with basic preventive health programs and a rising rate of chronic illness among the working employed.

4) Human Resource Generalists Often Lack The Resources and C Suite Support To Tackle Tough Change – HR is being asked to more than ever – with fewer resources. Ratios of HR professionals to staff have steadily declined in the last decade while the costs of managing human capital have soared. The historical inclusion of employee benefits and healthcare as part of their universe of HR responsibilities reveals the best and worst in firms. For many public and private employers, healthcare and employee benefits are secondary skill sets to HR generalists who are focused on a range of business and human capital issues.

In these difficult economic times, HR is often focused on limiting disruption to employees – – ensuring broad open access networks, limited medical management oversight and minimal hassle. The system that has resulted is one whose incentives are perversely built around treating chronic illness and not preventing it. HR teams are understaffed and often unable to build the infrastructure required to assess, mitigate and manage employee population health risks. The added burden of regulations such as HIPAA and ADA have spooked employers from wanting to be too prescriptive with employees over lifestyles and chronic conditions that may be borne out of a personal failure to manage health. The C Suite has expressed anger at increases but has generally been unengaged – electing to intervene in the eleventh hour of renewals instead of actively managing and supporting the internal efforts required to rein in their second largest cost beyond payroll. Firms that have shown HR and the C Suite engagement are posting as much as 10% lower annual medical trends according to a recent National Business Group on Health survey.

5) The GOP has not offered a coherent alternative to ACA where employer sponsored benefits would serve as a linchpin to market reforms – It seems clear to most industry insiders that if ACA is left to its current design – replete with its incentives to drop coverage, increase essential benefits, and avoid focus on personal health improvement – it will begin to unravel employer based healthcare. Providers have long since contended that private healthcare has subsidized public care as government cost shifts in an effort to reduce its growing burdens of Medicaid and Medicare.

Without private insurance as a counter balance and reimbursement incubator for more aggressive market based solutions, the current trajectory seems to be pointing us towards a single payer system. As larger numbers of consumers are pushed to purchase through exchanges dominated by a limited number of private commercial insurers, escalating costs and lack of choice may cause consumers to call for a more affordable “public” option beyond private insurance. Some feel the architects of ACA specifically designed the legislation to set these wheels in motion. The GOP has not seemingly connected the dots to articulate to the American people why the private sector should serve as the catalyst for market reforms. Many feel a single payer system within the US is necessary and inevitable given our infinite demands and finite resources. Others argue, the private sector has never really legislatively enabled to fulfill its role as a market force.

A political opportunity exists for an employer advocate to emerge in Washington – offering a blueprint that anchors employer sponsored plans, unleashes true market forces capable of forcing rationalization of oversupply, reducing variability in outcomes, restoring the role of the primary care provider, improving quality and enabling universal transparency.

6) ACA May Incent Employers to Dump Coverage – ACA offers employers a lower healthcare exit cost by pegging incentives to drop coverage well below the true actuarial cost of healthcare. A large percentage of industries will have workers eligible for generous federal subsidies (400% of the FPL). Many will quickly see the logic of dumping coverage and in doing so, immediate improve struggling margins.

Other employers will be hesitant to play first mover but will gratefully follow a competitor who may choose to dump coverage. CBO estimates for coverage dumping are extremely low in the first years of exchanges. The cost estimates of ACA also fail to identify the rising costs of federal subsidies if more workers buy through exchanges. The only real impediment to dumping healthcare is business’ distrust that the current penalty for dropping coverage will remain at $ 2,000. Many believe that future CBO estimates and GAO studies will reveal the need to adjust employer penalties to track with rising medical inflation. Today’s $ 2,000 penalty could morph into tomorrow’s $6,000 cost per exchange covered insured. Burdened by this knowledge, employers are justifiably cynical toward a government that remains $ 38T underfunded in its existing Medicare obligations.

7) Few Employers Seem Willing To Play The Role of Market Force – ACA passed with significantly less resistance from business than the united private sector front thrown against Hillary Care in 1994. In the 16 years since Clinton health reform was defeated, retiree and existing employee medical obligations have swelled along with the average costs of collectively bargained public plans. There is an increasingly emotionless calculus being discussed in private and public board rooms of America.

Do we want to be burdened with trying to save private healthcare? Who should fix it – employers or taxpayers? The omission of business leadership actively arguing in defense of its role to assume the role of market force for change suggests that employers are quietly preparing to get out from underneath their obligations if an opportunity presents itself.

8) Employers Don’t Believe Government Can Fix Fee For Service Medicare – Employers understand healthcare is a zero sum game. As government rations reimbursement to doctors – underpaying for services in Medicare and Medicaid, the private sector is overcharged to compensate for the payment inequities. Most employers are skeptical of the government’s ability to reign in fee for service Medicare obligations leaving one logical path – – Medicare hospital and provider fee cuts getting shifted to the private sector. This only escalates the rising healthcare cost burden – forcing employers to artificially shoulder CMS’s inability to medically manage fee for service Medicare utilization.

Most economists agree that unless we fix a fee for service Medicare, the current entitlements will sink our economy. Employers do not sense that government has the will nor the acumen to tackle their own third rail of entitlements and in doing so, many employers prefer tax payers shoulder the burden of the fix, not shareholders.

9) Smaller and Mid-Sized Employers Are Trapped in One-Size-Fits-All Pools – Individuals and small business have been the initial focus of reform. Historically, most individual and small insurance programs have been fully insured and pooled with groups of a similar size to create an adequate spread of risk to actuarially predict future costs and to minimize premium volatility due to catastrophic losses.

Most small employers have been stuck in a cycle of double-digit increases as costs of care rise and insurers aggressively manage loss ratios across their entire insured pools to protect profits. A small employer often has no access to their own claims information and as such, sees little value in adopting more disruptive plan designs that might improve their own workforce health status. In the final analysis, an engaged smaller employer ends up being blended with less engaged employers and has little ability to impact their own premium increases. As a result, small employers have become conditioned as commodity buyers of insurance and regard efforts to control losses through workforce engagement as a waste of time. Over the last ten years, insurers have benefited by laws that have precluded smaller employers aggregating purchasing power outside of these carrier pools.

Regulations that restrict the formation of multiple employer welfare associations (MEWAs) have limited smaller employers’ ability to establish “ safety groups” of like-minded employers willing to engage in more aggressive designs focused on reducing trend. The myth that self insurance is inappropriate for smaller employers and the nature of commercial insurance –which often steers employers back to insured arrangements, gives small employers few options. The passage of ACA will create similar insured pools in exchanges essentially replicating existing carrier pooling methodologies that have proven ineffective in controlling medical inflation. With the introduction of minimum loss ratio requirements and tighter community rated pricing, profits will be smaller but costs will continue to rise.

10) Unions Plans Have Not Shown A Willingness to Entertain Designs That Could Protect Their Own Long Term Financial Viability – Collectively bargained plans are some of the richest benefit designs in the US. Unfortunately, the most well insured people are often our most over treated, not our healthiest. One might even argue that the absence of incentives to become better consumers conspires to keep collectively bargained plans the most expensive and inflationary programs in the market.

Couple this with a captive, aging workforce that is descending into chronic illness and one can see how employers and local governments could be very tempted to shift this population risk to a public option pool where risks can be more adequately spread across other employers and/or taxpayers. Many municipal and collectively bargained plans are likely to exceed the federal maximum allowable cost thresholds triggering a “Cadillac” tax in 2018 – incurring an excise tax of 40% for plan costs that exceed $10,200 per individual and $ 22,500 per family. The current trajectory of most bargained plans has them eclipsing these exorbitant tax triggers well before 2018. Unions have historically been reticent to adopt more innovative designs that spur their members to change the way they access the healthcare system. These solutions include participating in premium networks that reimburse medical providers based on value – – directing at risk and chronically ill patients to proven centers of excellence, reestablishing primary care gate keepers and creating incentives for employee health engagement that shifts costs to those who are not compliant with choose health compliance guidelines.

In the next two years, the stakes will only climb in the cat and mouse game of healthcare. Those who advocate private sector market reforms are hoping the symptoms of rising employer resignation are temporary and motivated by a changing political and economic climate. Most believe business can play a vital role in reshaping healthcare delivery by demanding transparency, outcomes based reimbursement, personal responsibility, employee engagement and public policy changes that force market reform and better competition.

Changes should include – – all payer legislation to increase the field of competing payers, disclosure laws like Texas HB 2015 which requires insurers to release claims data for employers as small as 100 lives. Without data, smaller private sector employers are unable to focus on their true underlying cost drivers – the state of employee/dependent health and the incentives that do not exist to promote effective prevention.

Most business leaders seem to favor the notion of smaller government, reduced public spending, effective regulation and market based reform. Healthcare is emotionally charged. It impacts every voter and as such, politicians shy away from the difficult decisions around changing behavior. The real question for the private sector is whether it is willing to step up and assume its role as a catalyst for change or whether we have passed a critical tipping point as a society where our near term profit focus and increasing agnosticism to how we achieve those profits sets in motion an irreversible change that dismantles the last predominantly private system left in the industrialized world.

By playing the right cards, employers may still be able to preserve the best parts of private healthcare and begin to lead a process reelection hungry politicians do not have the will to take on. In winning this poker game of private healthcare, business can redirect government to follow its lead and focus on fixing fee for service Medicare and Medicaid.

America needs its businesses to remain in the healthcare game. The question remains unanswered whether employers will rise to the call – – or fold their hand.

Michael Turpin is Executive Vice President and National Practice Leader of Healthcare and Employee Benefits for USI Insurance Services. USI provides a range of business and risk brokerage, consulting and administration services to mid-sized and emerging growth companies across the US. USI is privately held and is a portflio company of Goldman Sachs Capital Partners.  Turpin can be reached at Michael.Turpin@usi.biz

The Day After Tomorrow – Human Resources and Surviving Health Reform

Medicare and Medicaid as % GDP
Image via Wikipedia

As the first snowflakes of change fall on the eve of health reform, HR professionals may soon wake up to an entirely transformed healthcare delivery landscape.  The Patient Protection and Affordable Care Act (PPACA) clearly will impact every stakeholder that currently delivers or supplies healthcare in the United States.

While the structural, financial, behavioral and market-based consequences of this sweeping storm of legislation will occur unevenly and are not fully predictable, this first round of healthcare legislation is designed to aggressively regulate and rein in insurance market practices that have been depicted as a major factor in our “crisis of affordability” and to expand coverage to an estimated 30 million uninsured.  However, fewer than 30 percent of employers polled in a recent National Business Group on Health survey believe reform will reduce administrative or claims costs.

Yet, it is unlikely that reform will be repealed.  For all its imperfections, PPACA is the first in a series of storm systems that will move across the vast steppe of healthcare  over the next decade resulting in a radically different system.  Whether reform concludes with a single payer system or emerges as a more efficient public-private partnership characterized by clinical quality and accountability remains obscured by the low clouds and shifting winds of political will.  One thing is certain during these first phases – inaction and lack of planning will cost employers dearly.

As the U.S. government struggles to rein in an estimated $38 trillion in unfunded Medicare obligations, the private sector and commercial insurance will feel the weight of the government’s efforts to reduce costs and impact our $12T of public debt.  HR professionals will have to act thoughtfully to insulate their plans from the inflationary effects of regulatory mandates and cost-shifting.

So while many HR professionals are getting hit from all angles – finding it difficult to  continue to transfer rising costs to employees, unwilling to absorb double-digit trends, under-staffed to intervene in the health of their populations and uninspired to assume the role of market catalyst to eliminate the perverse incentives that reward treatment of chronic illness rather than its prevention – they must forge ahead to address the intended and unintended impacts on the estimated 180 million Americans covered under their employer-sponsored healthcare plans.

To prevail over the elements, one must have a map and a flexible plan.  It also helps to have a qualified guide.  Consider the following as you brace for the “new normal.”

  • Think Twice When Someone Suggests Dumping Health Coverage – Many smaller and razor-thin margin employers will be tempted to drop medical coverage and pay the $2,000 per full-time employee penalty – essentially releasing employees to buy guarantee-issue coverage through health exchanges, which will be available in 2014.  Aside from impacting employers’ ability to attract and retain employees (consider how many of your employees will fall into the class of individuals eligible for federal subsidies), the assumption that the $2,000 will remain the baseline assessment per employee for those choosing to not offer coverage is a dangerous variable.  While it is clear that PPACA as it is currently constructed creates obvious incentives for employers to drop coverage and allow those eligible for federal subsidies to purchase through exchanges, it is unclear how the government can continue to subsidize proportionate contributions on behalf of those buying through exchanges when costs start to inevitably rise.  The General Accounting Office ( GAO) has already forecasted an increase of almost $500B in cost due to rising costs of subsidies as medical costs trend upwards. The forecasted CBO savings of $140B versus the GAO’s estimates of a $500B increase in costs have yet to be reconciled. Whether the $2,000 penalty was intentionally set low to entice employers to drop sponsored coverage and move America one step closer to a national system, or whether someone from the CBO missed a decimal, we expect the employer penalty for dropping coverage to increase as costs rise.  Employers should be certain to model their own costs to subsidize minimum levels of coverage today against an uncertain future of variable taxes that will only increase to fund coverage subsidies.
  • Pay attention to Section 105(h) now. – Many employers may be unaware that self-funded plans that discriminate in favor of highly compensated employees must comply with Code Section 105(h) non-discrimination rules.  As of the first plan year following September 23, 2010, these rules now will apply to non-grandfathered, fully insured plans.  Insurers may choose to exercise their right to either load rates for potential adverse selection or decline to quote because employers have failed to meet minimum participation percentages.  Section 105(h) testing is critical for industries, such retail, hospitality and energy that historically have excluded various classes of rank-and-file employees or provided better contributions and/or benefits to their top-paid groups. Penalties for not complying with the new regulations are $100 per day per employee.
  • Understand the sources of cost shifting pressure – As Congress and state governments wrestle with Medicare and Medicaid reimbursements and begin to focus on fraud, over-treatment and accountability for clinical outcomes, providers will feel the increasing pinch of reimbursement reform and will pivot in the direction of trying to shift costs to commercial insurance.  Physician hospital organizations (PHOs) and other integrated healthcare delivery systems – where health systems operate primary care, specialty and inpatient care – are accelerating – giving more clout to providers in contract negotiations and increasing commercial insurance unit costs, potentially exacerbating already conservative insurer claim trend assumptions.  HR professionals will need to better track employee utilization patterns for in-patient facilities especially in  high-use urban and rural commercial hospitals that also derive a large percentage of their revenues from Medicare. If a hospital derives 60% of its revenues from government reimbursement and 40% from commercial insurance, proposed fee cuts will impact facility revenues and create pressure to cost shift to private insurance.  An understanding of hospital utilization and consideration of tiered networks can help insulate your plans and drive lower costs.
  • Don’t be intimidated by self-insurance – Many employers underestimate the advantages of self-insurance and overestimate its complexity and risk.  But, in a post reform world, firms with more than 200 employees should give serious consideration to partial or total self-funding.  Aside from the total transparency of commissions, fees, administrative expenses and pooling charges, employers own their own data. The sooner employers get comfortable with self-insurance as a risk financing strategy, the sooner HR professionals can construct loss control programs that can mitigate claims costs. By self-funding, employers may better manage their population’s health risk; may avoid a myriad of state-based mandates legislated to fund potential shortfalls should local exchanges prove inadequate to contain costs; and may increase flexibility with respect to plan design. Be certain to understand the economics of your self insured arrangement.  A cheap third party administrator with weaker provider discounts and limited medical management capabilities ultimately costs you much more than services provided by a national insurer with better discounts.  In other cases, insurers may have more than one PPO network and assign the less aggressive discounts to their self funded TPA based clients.  Make sure you press for the best possible discounts.
  • Forget Wellness – Think Risk Management. – Wellness has become a broad-brush term to describe any sponsored effort at health improvement. Forget wellness. Population risk management (PRM) is the operative term to describe a process of understanding embedded health risks and structuring plan designs to remove barriers to care and keep people healthy. PRM requires access to clinical data, cultural engagement and designs that have consequences for employees who do not engage. If employers do not understand the risk within their workforces, it is impossible to improve results or be confident that plan changes will drive a desired result.  For example, more than 50 percent of claims arise out of modifiable risk factors and as few as five percent of employees drive 50 percent of claims.  The great news is PPACA actually increases employers’ ability to charge up to 30 percent more in premium for individuals who do not actively get and stay healthy.  Also, employers that establish comprehensive workplace wellness programs and (1) employ less than 100 employees who work 25 hours or more per week and (2) do not provide a workplace wellness program as of March 23, 2010 can take advantage of available government grants.
  • You are the “market forces” everyone keeps talking about and you need to use this power to influence on-going reform. – Employers purchase healthcare for more than 180 million Americans – about 60% percent of all individuals who have healthcare coverage, but ironically feel less empowered, informed or in control of their spending or their employees’ behavior as they access the system.  HR professionals must become activists for public health improvement and change – promoting healthy behaviors, transparency and accountability while putting an end to public-to-private cost shifting, overtreatment, fraud, abuse and clinical variability. Congress will only listen to employers because the other stakeholders have a perceived conflict of interest in how health reform is ultimately resolved.  Employers must build up the courage and resolve to begin to reshape the local, regional and national delivery models that result in overtreatment and lack of accountability for poor outcomes.

As we look out the window, the full force of reform is still swirling somewhere off in the distance.  As business hunkers down and adopts PPACA legislation, the question for many in HR is simply – will reform happen for me or to me?

Michael Turpin is Executive Vice President and National Practice Leader of Healthcare and Employee Benefits for USI Insurance Services. USI provides a range of business and risk brokerage, consulting and administration services to mid-sized and emerging growth companies across the US. USI is privately held and is a portflio company of Goldman Sachs Capital Partners.  Turpin can be reached at Michael.Turpin@usi.biz

Cat’s Cradle – Untangling the US Healthcare system

cats_cradle_article_by_mike_turpin_march_20081

Should H.R. Stand for Health Reform?

Should H.R. Stand for Health Reform?

By Michael Turpin

There is a story of Winston Churchill addressing an exhausted and beleaguered group of young RAF pilots during the height of the Battle of Britain.  As he surveyed the demoralized men who had logged so many combat hours and had witnessed friends die in battle against a superior Luftwaffe, he stood silent and allowed a heavy pregnant pause to fill the air.  Churchill turned to the pilots and posed just two questions:

“If not you, than who?  If not now, then when? “

The primary purchasers of healthcare for over 180 million Americans are human resource and benefits professionals. The job description for most HR and Benefit professionals is managing human capital.  These increasingly difficult jobs strive to achieve a harmonic convergence of employee attraction, retention and development that leads to growth in revenues and profit.  Yet, when faced with increasingly inflationary healthcare costs and fewer choices to mitigate them, employers are increasingly taking the path of least resistance – passing on rising costs to plan participants rather than confronting more deeply embedded drivers such as poor lifestyles, lack of consumerism and a reluctance of stakeholders to be held accountable.  It’s time we grab our national health crisis by the folds of its own fat and force fundamental change. It is going to ultimately fall to human resource, benefit and other business leaders to deliver some tough messages to stakeholders who have failed to solve this crisis.

As we follow the healthcare reform debate in Congress, the silence from many employers has been deafening. The genesis of true market-based reform can only occur at the level of the employer. HR and benefits leaders must exert a level of influence over the debate. As we enter this era of tough love and economic survival, it’s time for those who are most experienced to speak up.  HR and benefits managers should consider the following eight steps as a means of seizing the high ground in driving market reforms in healthcare.

1)    Advocate “loss control for healthcare” – Most smaller and mid-sized employers feel they have little leverage or control over their healthcare costs.  Ironically, these same individuals are active and aggressive in managing the costs of occupational health through workers compensation loss control programs.  If clinical industry benchmarking data indicates that 6% of a workforce is normally diabetic and your claim data suggests less than a 2% incidence of diabetes within your claims, you may want to focus on determining whether you have a higher rate of undiagnosed illness using health risk assessments and predictive modeling instead of blindly assuming that your loss experience is tracking more favorably than industry norms.  You must design value based plans that remove barriers to care and encourage prevention. It is time we develop strategies to drive non-occupational health management as a course of business.  Call it “wellness”, “productivity improvement” or “presenteeism” – it is all about improving the health of our employees and their families.  The days of fencing with finance over the return on investment of a healthy workforce must be replaced by a corporate commitment to improve workplace health.

2)    Have an opinion – Too many HR and benefit industry professionals do not express their opinions about what needs to change.  Get involved in industry associations.  A friend who runs a major employer coalition in a large US city confided to me how difficult it was to get HR and benefit professionals to participate in roundtable discussions with insurers, hospitals and other key stakeholders.  Call it apathy or a lack of bandwidth. The absence of employers (particularly hard hit mid-sized and smaller employers) voicing strong opinions about how the next iteration of healthcare should evolve in each market creates a void that may soon be filled by politicians and academics who have a less pragmatic understanding of the irreversible downstream consequences of radical reform.

3)    Insist that double digit trend increases are unacceptable – For insurers to continue to deliver core trends in excess of 8% and fully loaded trends well into double digits indicates that payers have not delivered on promises to offer lifestyle changing medical, disease management and claims management impacts. Insurance company underwriting and trend setting practices are an opaque alchemy.  Any vendor who purports to offer health plan management services should have their remuneration tied to managing your medical trend.  In the final analysis, trend drives cost.   If the best that the for profit and not for profit healthcare industry can offer is double digit increases, it deserves to be replaced by an alternative system.

4)    Force the C Suite to get help amplify your message– Senior management, finance and HR must work in partnership to assess risks, seek to eliminate and/or mitigate them, determine which risks should be retained through self insurance and which should be defrayed through risk transfer.  The days of treating insurance renewals like the purchase of a car – “If they get to 10%, tell them we will renew.  Otherwise, put it out to bid” – must be replaced with a more thoughtful year long discussion on claim cost drivers and ideas to mitigate near term and longer range claim costs.  Benefits are an investment, not a commodity.

5)    Understand cost shifting is not cost containment – Managing healthcare expenditures does not mean merely cost shifting increases to employees.  It means engaging and communicating with employees around cost drivers, lifestyle obligations and plan changes that are designed to improve health. Many employers opt for open access networks allowing employees the ability to bypass primary care in favor of more expensive specialty care self-referrals.  These paternalistic designs limit disruption but drive higher medical inflation which in turn, requires more cost shifting to employees. With new claims and episode of care data helping to designate providers who deliver higher quality and lower cost outcomes, we can design a new healthcare system around superior providers and higher quality outcomes.  We can focus on rewarding primary care providers for keeping people healthy instead of bankrupting our system around a legion of medical specialties that are exponentially growing to serve the needs of tomorrow’s chronically and catastrophically ill.

6)    Develop a plan – When was the last time your broker or consultant sat down with you during your budget cycle and helped develop your cost assumptions for the coming fiscal year?  Every 100bps of medical trend saved translates into dollars contributed to earnings, shareholder value or private equity owner returns.  HR and Benefits can been seen in a much more strategic light when a plan is developed and followed – particularly one that drives so much annual cost and increases disproportionately to all other corporate costs each year.

7)    Participate in provider negotiations – Insurers are often maligned for their business practices.  While health plans are clearly focused on shareholders and profits, they are critical partners to managing medical trend.  Most insurers privately confide their lack of confidence that employers will support them if they get into a major fee dispute with a large hospital system or medical group. Larger hospital systems are banking on the fact that employers will not tolerate the noise from employees resulting from the loss of a major healthcare system from their network.  This lack of solidarity forces the insurer to agree to pay larger fee increases in contract negotiations – leading to higher medical trends for the employer.

8)    Calculate broker value as outcomes divided by cost -.  There are 28,000 consultants, brokers, financial advisers and agents delivering advice on healthcare to employers across the US.  Like any industry, there is wide variability among intermediaries.  Many of these middlemen are reactive, focusing on annual plan marketing, issue resolution and administrative support services for HR. In the end, the calculus of determining service value should be outcomes divided by cost.  If you cannot measure outcomes (e.g. year over year trend mitigation, claims and vendor performance management) and you do not know what your broker or consultant charges, it is impossible to determine the value of services.

The greatest single asset we possess in American business is our workforce.  HR and benefits are the ombudsmen and advocates for these human resources and must use benefit plans as levers to drive productivity and process improvement.  Sounds like a big responsibility?  It is.  While HR and benefit leadership may seem thankless in these dark days of recession, rising medical costs, declining profits and layoffs, it can be a highly rewarding platform for those capable of elevating themselves to the role of business leader – helping ensure the personal health of employees, their families and ultimately their company.