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PRIVATE PAYERS FORGE DISRUPTIVE NEW BUSINESS MODEL

CHIEF EXECUTIVE OFFICERS across America, with a few exceptions, should offer a class-action apology for allowing the economics of health care to get totally out of whack.

By any financial measure, the existing business model for health care in the United States is busted, and the people in the corporate offices let it happen. They are paid lots of money to fix major problems facing their companies and the economy, and only a few have raised health care to the level of a strategic priority.

They didn’t apply the golden rule—he who has the gold rules. They are the payers for about half of the national health care bill, and they didn’t rule. (Indirectly, they pay for the other half of the nation’s health care bill, the public half, as well, through the taxes paid by their companies and from the taxes taken out of the wages of their employees.) Specifically:

■ The CEOs didn’t create a marketplace to bring supply and demand disciplines to the delivery of care.

■ They didn’t engage their employees as active managers and consumers of medical treatments.

■ They gave in on union contracts that enabled workers to practice economic misbehaviors.

■ They didn’t create a culture of health in their organizations.

■ They allowed providers to vertically integrate the health care supply chain, to the great disadvantage of employers and their employees.

■ They didn’t deploy the managerial expertise of their teams to build a better business model for health care.

Fortunately, there is an amendment to the CEO apology. A growing vanguard of innovative CEOs has taken measure of the magnitude of the challenge and has moved to action. The CEOs’ collective efforts have given birth to a disruptive business model that works. They are CEOs or former CEOs like Paul Purcell of Robert W. Baird & Co., Jim Hagedorn of Scotts Miracle-Gro, Steve Burd of Safeway, Tim Sullivan of Bucyrus International, and Bill Linton of Promega. (More on their stories later.)

A growing vanguard of innovative CEOs . . . has moved to action. The CEOs’ collective efforts have given birth to a disruptive business model that works.

This book is full of innovations that executives across the country have implemented in their companies. But before we dive into the new model, let’s look at why the current model just isn’t working.

A MODEL IN NEED OF REPAIR

There is a plethora of ways that the current model is broken, tracing back to World War II, when employers added health care benefits as a way around wage controls. The evidence for the current breakdown includes:

■ Costs have roughly doubled every eight years for the last four decades. At this rate, health benefits could equal base pay for many jobs within a decade. Some manufacturers report that the cost of insuring their workers exceeds that of production materials.

■ Costs per employee for family coverage average $16,351 in the United States, according to the Kaiser Family Foundation, and exceed $20,000 in many organizations. Those are painfully high numbers for any employer.

■ The Milliman Medical Index put 2013 costs at $22,030 per family of four, split 58 percent to the employer and 42 percent to employee in the combination of premiums, deductibles, and copays. The employee share of $9,144 exceeds the cost of food for most families.

■ Prices for procedures vary wildly—as much as 300 to 400 percent within regions, even from hospital to hospital and clinic to clinic within the same health system. It is pricing chaos.

■ More than 40 percent of U.S. companies don’t offer health care insurance. The prime reason is escalating costs.

■ Medical bills are now the leading cause of personal bankruptcy in the country.

■ The U.S. government has been running trillion-dollar annual deficits, with health care entitlements a leading cause of the red ink. Major national priorities like education and environmental advances are being crowded out. A recent defense secretary said the Pentagon spends more on health care than on weapons.

■ Many state budgets hemorrhage red ink or incur greater debt because of undermanaged health costs, especially in Medicaid.

■ Some municipalities have gone bankrupt, with public employee health costs as a major contributor to their insolvency.

A recent defense secretary said the Pentagon spends more on health care than on weapons.

This catalog of negative consequences adds up to a complete indictment of the existing business model for medicine, even as doctors and their teams deliver minor miracles on a daily basis on the treatment side. U.S. physicians and nurses are on the cutting edge when people get sick. Almost all practitioners deliver empathetic, professional, caring service.

But fixing sick people isn’t good enough if it bankrupts or financially stresses them, their companies, and governments in the process. The economic side of medicine has to be as effective as the medical side.

The Hippocratic Oath for physicians—“First, Do No Harm”—has to extend beyond medical outcomes to the economics of care.

WHO’S GOING TO FIX IT?

Unrelenting health care inflation has generated extreme frustration at private companies. Unlike public sector business managers, they cannot pass along cost escalation. Their customers won’t allow them to pass along excess costs. With nowhere to turn for relief, private sector payers are revolting. They have learned that management has been the missing link in U.S. health care, that management disciplines have to be brought to bear.

Put on another hat. Think about what a turnaround manager would do if confronted with a totally busted business model, one that has been going the wrong way for decades? The turnaround guru would look at the existing players—insurance companies, provider organizations, policy wonks, health care academics, and political experts in health care—and that manager would be highly skeptical of their ability to turn things around. That manager would conclude that the major players in health care have been talking reform for decades but have demonstrated little success.

Major players in health care have been talking reform for decades but have demonstrated little success.

Our expert would be looking for a clean sheet of paper. Our turnaround tough guy would look for a new business model.

Some hospital initiatives have slowed the cost escalation, especially among providers that have employed the lean disciplines that were introduced into manufacturing with great success 40 years ago. But only about 1 percent of providers, like the Cleveland Clinic and Gundersen Health and ThedaCare in Wisconsin, have adopted transformational lean methods.

Provider corporations that own hospitals and clinics, whether for-profit or not-for-profit, have had little incentive to fix the old system heretofore. These huge organizations have profited handsomely in the current dysfunctional environment. While they face government price controls, they face neither market disciplines nor regulatory price controls on their private sector book of business. They see limited competition. This means there is little incentive to cut costs. They are almost immovable objects. Why should they move? Life, for them, is good.

Provider corporations...have profited handsomely in the current dysfunctional environment.

It is also good for health insurers.

Since the main assets of health insurance companies are their networks of providers and the volume discounts they bargain for, it’s unrealistic to expect them to be agents for reform. Why would they push their de facto partners hard when they need them and when they get a cut of the rising costs? Indeed, they have a huge disincentive to drive down overall costs and premium prices, since doing so would reduce their revenue increases.

The Affordable Care Act may expand health care coverage to 94 percent of Americans, but it makes the cost outlook worse. Under “medical loss ratio” rules, health insurers may keep for themselves no more than 15 percent of large company plan premiums and no more than 20 percent of small company premiums. This gives them every reason to want the other 85 percent or 80 percent—the amount they’re obliged to spend on medical care and quality improvement—to be as high as possible so their 15 percent to 20 percent cut in dollars is protected.

It’s not that health insurance companies aren’t seeking some efficiencies, but their intrinsic motivations for reform are not compelling. Cost reduction is just not where they live day in and day out.

Would-be reformers who assume that competition among insurance companies will rectify the economic ills of medicine in America are simply misguided. Competition among third-party payers has existed for decades, with little resulting reform. Why would that change going forward?

The real horse to ride for reform has to be the payers—employers and their employees as consumers. Because of the economic pain surrounding health care, the reform campaign has been building in the private sector, where most innovation takes place.

Private payers are saying, “Enough already!” It’s time to take charge.

They are the parties demanding what I call real health care reform. For decades they have faced stiff premium increases, year in and year out. A 10 percent increase on a low base cost in the old days was bad enough, but a 10 percent increase on premiums on a higher base, as high as $20,000 per employee, is untenable.

There are two major ironies in all this. First, the high costs caused the access issue that ObamaCare tries to address. If costs were low, access wouldn’t be an issue. Second, because of decades of hyperinflation of health costs, because costs are so bloated, huge savings await companies that manage health care costs aggressively.

ENTERING THE GAME: WHAT BUSINESSES ARE DOING NOW

The long-AWOL executives of corporations have come belatedly, but decisively, to the challenge of managing the chaos on the economic side of American health care. No other vendor would get away with double-digit increases for decades.

CEOs, CFOs, and COOs in front-running companies are doing radical surgery on an unsustainable system. They are bringing management concepts and marketplace principles to bear. They are tackling what they see as an undermanaged supply chain.

That means:

■ Elevating their employees from passive, entitled recipients to engaged consumers

■ Insisting on transparent prices and quality

■ Creating incentives and disincentives and a culture of smart consumerism

■ Moving business to the highest-value providers.

■ Treating health care vendors with respect, but demanding performance

■ Creating a culture of fitness and health at their companies

■ Making workforce health and health costs a strategic priority

In the process of making health care a top-of-mind issue, they are inventing a far better business model for the delivery of health care for the whole nation. In that sense, it is patriotic work.

Before they got fully engaged, it was common practice for managers to use the one-time tactic of shifting costs to employees. But there is only so much mileage there. Employees can only afford so much for care, especially since wage increases have generally been anemic for more than a decade.

The executives have learned that health costs can be managed, and they have discovered they are in the business of behavior change. They have calculated that a well-managed health plan can be a competitive advantage.

Consider the fundamental health care dynamics today: insurance companies have a short-term, transaction-based, impersonal relationship with the insured’s employees.

The same short-term mentality is true of large corporations that run hospitals and clinics; they excel at reacting to, not preventing, medical problems. In the existing model, primary care office visits last six to eight minutes. Frontline doctors oversee 2,500 to 3,000 patients each, forcing them to act only as gatekeepers to more expensive and profitable specialists. They are paid by volumes of procedures. Theirs is a production-centered business model, not a patient-centered model.

In stark contrast, most, though not all, employers foster a mutually beneficial, long-term relationship with their employees. Assuming a career of 25 to 40 years and an average of $16,000 in annual health costs per employee, the mutual bill for health care over a long career can easily exceed a half million dollars.

Conclusion? Employers and employees are the only health care players with a deep mutual interest in a long-term game plan. They are in a health care compact for many years.

Employers and employees are the only health care players with a deep mutual interest in a long-term game plan.

Good health profits them both—not just in workplace productivity and happiness but also in their respective budgets. Remember: the average split in the country on health care expenses for a family plan is 72 percent employer and 28 percent employee. (Some experts put the employee share higher.)

What better team for fixing the broken business model than employers and employees? This is the tandem of payers to ride for real reform. And that is exactly what’s happening.

THE STEPS COMPANIES ARE TAKING

Exasperated private payers, led by large and medium employers, are staging a revolt. Defenseless small companies, who face the stiffest premium increases year in and year out, are joining the march. Companies with workforces as small as ten people are racing toward self-insurance as a first step, thereby assuming the risks, responsibilities, and rewards of keeping costs in check.

Their second step has been to roll out consumer-driven plans that engage employees in becoming responsible users and buyers of medical services.

That, in turn, requires data sleuths, known as transparency and analytics vendors, who collect and slice and dice the medical charges and outcomes from many health care transactions to shine a light on prices and quality. They offer clear comparisons of costs and quality. It is a new lens that allows consumers to make sound decisions on where to get care.

The payers’ fourth step is to contract for rigorous on-site providers to manage health. Their health teams tackle chronic diseases, believed to cause 80 percent of health costs.

Chronic diseases [are] believed to cause 80 percent of health costs.

The sum of these kinds of structural changes in health care delivery constitutes a better model, a disruptive model. They spell real reform. And they create a virtuous linkage of improved workforce health and lower costs.

REFORM TAKES A VILLAGE

Bending the cost curve doesn’t come easy. It takes effective management. It requires culture change. It means difficult behavior change at the personal and organizational level. It entails business risks. But as innovative corporations are proving, it can be accomplished.

Major change doesn’t happen in a corporation without leadership from the C-suite, from the CEO on down through the management team. And it requires engaging the troops. It is simultaneously a top-down and bottom-up revolution. That sounds paradoxical, but it decidedly is not. The success of any major corporate initiative depends on that vital interaction.

Relying on human resource managers and benefit specialists to manage something as large and strategic as workforce health just doesn’t work. People who choose that profession tend to be caregivers, not change agents.

The reason the revolt is accelerating is that the top managers have come to two realizations: health costs could take their enterprises down and they can be managed. They have learned they can turn a negative to a positive.

Joel Quadracci, CEO of Quad/Graphics, the nation’s second-largest printer, said publicly, “Who would have thought that health care would become a competitive advantage for a printing company?”

Or, I might add, for many other companies?

The stakes are high.

For instance, one company (Robert W. Baird & Co., see box on following page) expects to cut at least 10 percent from its annual billion-dollar health care coverage bill via best practices. At seven times cash flow, that would mean an addition to that company’s enterprise value of $700 million.

BEST BUSINESS PRACTICES IN HEALTH CARE

We can learn from what these innovative companies are doing. This book will lay out the three-year playbook to move from a broken business model to best practices for health care delivery—to a reinvented, disruptive model. It will tell stories of private companies that are leading the way in proving that costs can be curbed, even flatlined.

They are not talking reform. They’re doing it. Their CEOs are leading the charge.

ONE COMPANY’S PRAGMATIC JOURNEY

Robert W. Baird & Co., an employee-owned financial services company, has taken a long, pragmatic road to better health care results.

CEO Paul Purcell made it a strategic issue a decade ago, starting with a wellness program at its Milwaukee headquarters in 2004. The self-insured company, which has 2,700 workers, offered $100 to each worker and another $100 to each worker’s spouse for undergoing an online health risk assessment about eating and lifestyle habits. It also offered biometric screening for cholesterol, blood pressure, and glucose levels.

“We were experiencing 15 percent to 20 percent increases in health costs at the time,” explained company benefits manager Lisa Mrozinski in an interview. “We had to get that under control.”

That initial effort to turn things around was underwhelming. “We had a 45 percent participation rate,” Mrozinski said. For many workers, $100 wasn’t enough to overcome their distrust of the company’s health insurance administrator, who oversaw the program. “We could have reassured them 100 times that HIPAA (federal privacy law) assured their privacy, but there was still that lack of trust.”