Managing Healthcare Costs Like a CFO
Before I got into the employee benefits business, I was a Chief Financial Officer for a number of companies over a 15 year time frame. As the CFO, I spent a considerable amount of time building strategies and action plans to control all of the major line items on my income statement; all of them except one – employee benefits.
I thought the way to control these costs happened once a year during the renewal process. Every broker I worked with would come in and show me all of the “options” available for this year’s renewal. Based upon the spreadsheet, I was left with little choice but to choose the least offensive option. That was how we “controlled” our benefits cost. Wow, was I wrong.
Healthcare cost is no different than other costs incurred by a business. The total cost of healthcare is a function of how often your employees use their medical plan and at what rate you pay the provider at the point of service; in accounting terms, rate X volume equals total cost. With that in mind, companies need to develop strategies on how to attack each element of the equation.
The volume side of the equation is best addressed by a robust wellness program. If everyone is healthy and doesn’t need medical care, the volume now equals zero. Zero times any number is zero. I realize it’s not practical to assume you can get your volume to zero, but you should be able to get a lot closer than you think. Let’s explore some numbers.
Eighty five percent of the total cost of healthcare is driven by claims (i.e., people using the healthcare plan). The remaining 15 percent is for the insurance carriers’ administration and profit. Of the 85 percent, 90 percent of the claims are driven by ten percent of the employee base. And, of that 90 percent, 75 percent is avoidable through lifestyle choices. So, wellness matters.
The rate side of the equation is actually easier to affect, although information is critical. One of the greatest challenges with our current healthcare system is the complexity surrounding cost. For example, if you ask your doctor how much a certain procedure will cost you, you’ll often get a response like, “I don’t know, you have insurance, don’t you?”
That’s easy for your doctor to say, he or she isn’t paying for it. The fact of the matter is the company and the employee is paying for it, dearly. Moreover, many people don’t realize the wide disparity in the cost of routine procedures such as MRIs, CT scans, etc. Fortunately, there are a number of organizations, including the insurance carriers, who are now offering tools to help find the best cost for many routine procedures. By educating, incenting and persuading employees to make better buying decisions through the use of these cost and quality transparency tools, companies have a fighting chance to lower their healthcare spending. Companies must become proactive in educating their employees.
So, what I've learned since leaving the CFO chair is healthcare costs are much more manageable than I thought. The key, however, is someone must actively manage continuously, not once a year at renewal.
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