By JOHN TORINUS | Jan. 13, 2014
Could it be that private-sector employers have cracked the code on how to tame out-of-control health costs in America?
Politicians, academics and pundits don’t know what to make of the fall-off in recent years of health cost inflation in the United States.
Amid their guessing game on the reasons for the moderation of the long-standing up-trend, Democrats from president on down have rushed to take the credit for “bending the curve” through the Affordable Care Act, also known as Obamacare.
The timing on that contention, though, just doesn’t work. The trend line on health costs started down well before ACA was muscled through Congress in 2010. From what could be called hyperinflation in the 1980s and 1990s in the 7 to 8 percent range (the high point was 12 percent in 1982), the rate of inflation started dropping in 2004. It hovered around 4 percent from then through 2011 and then went below 4 percent in 2012.
The main features of Obamacare have just started to kick in, so any impacts post-date the surprising decline. With the exception of adding coverage for a few young adults under 27, who don’t spend much in any case, ACA has had little effect to date on companies like mine and on most of the population.
Some economists have theorized that the Great Recession and its hangover effects are the reason for the spending deceleration. There is surely some truth to that contention. People with tight budgets spend less on everything.
But the economy is recovering slowly, and the recession ended four years ago. Moreover, household wealth has been helped in recent years by rising home and stock prices. Health care spending then should be rising again, right? But it’s not. Even in the face of the growing expenses of an avalanche of retiring boomers, the deceleration of health costs continues.
Its inflation is expected to come in below 3 percent in 2013.
There is an additional and more compelling thesis for the lower inflation — observed more clearly at the ground level than from inside the Beltway or from the ivy tower. It is that the deflationary dynamics are being driven company-by-company in the private sector.
Vanguard employers have developed a set of innovative best practices that can drop their costs by 20 to 40 percent. When the best practices are added together, they constitute a new business model, a disruptive model, for the delivery of care in the country.
Think of the new model as you would think of a car with major platforms (power, drive train, chassis, steering and electronic controls) with many moving parts. In the reengineered health care model, the platforms are self-insurance, consumer-driven health plans, transparency on prices and quality, payment reform driven from the demand side, and pro-active primary care delivered through on-site medical facilities.
Each of these strategies yields significant savings, but together they provide dramatic cost reductions. Better yet, many of the cost reductions come from improved workforce health and from keeping people out of expensive hospitals.
Over the last decade, since the authorization of health savings accounts in 2002, private purchasers have moved fast to the new platforms. It could be called a stampede. Here’s the evidence:
Self-insurance — 93 percent of corporations with 5,000 employees are self-insured. Midsize and smaller firms are following suit so that 60 percent of all private-sector employees are in such plans. Why the massive shift? Companies that have elevated health care to a strategic priority want to control their own destinies. They want out of under-managed insurance pools.
Consumer-driven health plans — 60 percent of private companies now offer plans with high deductibles offset by personal health accounts. An estimated 40 million Americans are in CDHPs and 70 million are covered by high-deductible plans, making them newly engaged consumers. Why the incredible transition? Because CDHPs have proved beyond debate to reduce company costs by 20 to 30 percent.
Transparency on value — After decades of dense fog over prices and quality, companies can now buy reasonably accurate information to expose provider prices and performance. Of note, there is an emerging inverse correlation between price and quality. Find the cheapest hospital for your heart bypass. Lean disciplines work as well in health care as in manufacturing to eliminate waste and defects. Corporations are cutting deals for elective procedures with centers of value like the Cleveland Clinic, Geisinger Medical Center, Mayo Clinic and Johns Hopkins Hospital. It’s medical tourism within the country.
Payment reform — With price variations on procedures of 300 percent or more, there is gold to be mined. Tough purchasers are demanding and getting bundled prices and warranties on surgeries. The California Public Employees’ Retirement System, which buys care for 1.3 million members, has deployed reference-based prices that cap payments, such as $1,500 for colonoscopies or $30,000 for joint replacements. Providers are meeting those price caps. Some employers will pay only Medicare rates plus 25 or 40 percent. In short, private payers are scrapping the outmoded pay-for-volume model. As one analyst observed, for providers, the revenue fairy is dead.
On-site clinics — More than 25 percent of large corporations have taken back the front of the supply chain by setting up medical clinics for their people on premise. Quad/Graphics, the nation’s second largest printer, led the way two decades ago and now delivers proactive care for other corporations at 40 clinics. Savings are 20 percent or more. Company doctors order tests (only as needed), prescriptions (mostly generics), specialists (only in complex cases), and admissions to hospitals (down by as much as half). They’ve gotten Six Sigma serious about chronic disease management, the root cause of 80 percent of the nation’s health costs. There are now more than 1,000 on-site clinics, delivered by the likes of Walgreen’s and Humana.
These fast-moving initiatives, coupled with a new army of consumers, are making a huge difference for best-practice purchasers in the private sector, which pays about half of the national health care bill. Best-practice companies deliver health care for $8,000 to $10,000 per employee, compared to a national average of $15,000 to $16,000 and to the Cadillac level in Obamacare of $27,500.
These corporate buyers are demonstrating that making health care affordable is more about management science than political science. They are showing that a bottom-up revolution in health care trumps a top-down, unempirical experiment like ACA. They are the ones bending the trend line with a thoroughly disruptive new business model.