1
RAMPANT HEALTH COSTS CAN BE CONTROLLED
IN 2003, I came to the realization that wildly out-of-control health costs could take down my company. We ended that year with a total health care bill of $5.5 million for employer and employees combined, up almost 12 percent from 2002 and 23 percent from 2001.
Further, we were looking at a 15 percent hike in 2004, an increase of more than $800,000. We had other expenses under control, but our health costs were metastasizing. We
could not afford hyper-inflation in this major cost bucket. We had to do something about it and do it fast.
Serigraph is a mid-sized company that sells graphic parts, like the face of your car’s instrument cluster. We sell to major consumer products manufacturers. We are two layers down the supply chain. So we lack leverage and are unable to pass on cost increases through higher prices.
Worse, our reality is heavy pressure to lower our prices each year of a multi-year contract. These “price-downs” mean we live in a world of deflation. We have to match the “China price” or the “India price” through high productivity and cost control. That makes us particularly vulnerable to hyper-inflation in any major cost sector.
Health costs are our third-largest expense after payroll and raw materials, and in 2003 they were heading to second-largest. We had no choice but to tame this runaway beast. Gaining control of medical expenditures had literally become a matter of survival for our manufacturing operations in the United States.
We had tried all the obvious tactics to lower health costs. Those included a wellness and fitness program; an annual quoting and bidding process to land a percentage point or two more in discounts from health providers; some rationing (only one Viagra pill per week, for example), and a standard plan that shifted some costs to co-workers with a deductible of $300 and 20 percent co-insurance. These anemic attempts throughout the 1990s may have mitigated the rate of increase, but at the end of each year, we still showed staggering cost hikes.
Several alarmed CEOs and I had formed a coalition of sixteen major employers in Washington County, Wisconsin, where my business is located, to aggregate more buying power. With 18,000 lives combined as leverage, we negotiated hard and won a few percentage points of better discounts from hospitals, clinics, and doctors. Nonetheless, our costs kept escalating all through the decade, and a couple months of health care inflation wiped out the wins on improved discounts. Trying to use our buying power against the larger selling power of increasingly consolidated providers did not work. It was very frustrating. We seemed powerless.
LITANY OF EXCUSES
I went to dozens of sessions on the economics of medicine, only to hear the rationale for why the rise in health costs was inevitable and unstoppable. I listened to the political dialogue at the state and federal levels and came to the realization that most experts endlessly stated the obvious: health costs were rising fast and were taking an economic toll on everyone. They talked mostly about who would or should pay for the escalating costs, not about controlling them. That remains largely the case. Meanwhile, more and more Americans were being priced out of health care coverage.
The litany of excuses for relentless health cost inflation sounds like this:
• The population is graying, and that means more medical conditions.
• Trial lawyers have caused a litigious environment that necessitates defensive and unnecessary medicine.
• New technology, which drives costs down in most industries, drives up costs in health care.
• Medicare and Medicaid under-pay providers, who are then forced to shift costs to payers in the private sector.
• Insurers and their executives make too much money.
• Doctors make too much money.
• Hospitals and their executives, including nonprofits, make too much money.
• Shortages of medical professionals drive up wages.
• Drug companies spend too much on advertising.
• Hospital systems are required to do charity care.
• Americans are too fat, eat and drink too much, don’t exercise enough, smoke too much, and don’t follow treatment regimens.
Serigraph did not have the luxury of bowing to those excuses. We could not take a duck on the double-digit inflation. And I did not want to cost shift to my co-workers.
About that time, I discovered a book by Regina Herzlinger, a Harvard business professor, titled Consumer-Driven
Health Care. In it, she prescribed a strong dose of marketplace dynamics and employee empowerment, the kind of breakthrough thinking we had been seeking.
Her ideas made a lot of sense, especially since Serigraph had a long tradition of asking its co-workers to fully engage in solutions to complex problems. We have always said to our people: “Help run the company.” They pitched in when we moved to total quality management. They bought in when we set a goal of customer intimacy. They took ownership of the results when we launched a lean journey. So why wouldn’t they help with taming health costs—if we gave them the right incentives and tools?
Besides, individual responsibility is the American way.
A handful of pioneer companies had already embarked on consumer-driven options a year or two earlier and were reporting success. Humana, a large national health insurer, took the leap with its own people as guinea pigs. It reported a less than 5 percent cost increase for its own employees in 2003. That was a lot better than the double-digit inflation we and the rest of the country were experiencing.
We needed triage, so we moved fast. We took the plunge to a consumer-driven health plan on January 1, 2004. The decision carried considerable business risk.
We had to invest money up front—about $2,300 per family or $2 million company-wide—on the bet that consumerism and empowerment would save that much and more during the upcoming year. We were uncertain of the outcome and nervous about the up-front payouts to co-workers. At the heart of it, the gamble was that those new
costs would be more than offset not only by the higher deductibles and co-insurance but also by individual behavior changes. We were hoping for improvements in utilization, purchasing, lifestyles, and improved personal regimens for dealing with chronic diseases.
Further, we decided to not just rely on incentives and disincentives but to offer a holistic approach to keep our people healthy and out of the hospital. That was based on the obvious premise that managing health and health costs must be done concurrently.
It did not take long to see that the reform was taking hold. Our people started shopping for better value in terms of quality and price. They started asking their doctors and clinics what treatments were going to cost. Most providers responded, “What do you care? Your insurance covers it.”
Our people replied, “No, it’s our money, too.”
Total costs for 2004, including our up-front incentives, dropped—repeat dropped. That outcome was far, far better than the 15 percent increase we had projected under the old plan. Consumer-driven health care reform was working. More than six years later, it is still working. (See Appendix for plan outline.)
In 2003, Serigraph’s medical costs averaged $8,302 per family. Health insurer Kaiser Permanente calculates the U.S. average each year and put it at $9,068 per family, so we were running 8.5 percent lower than the national average. In 2009, Kaiser put the U.S. average at $13,591. We came in at $8,631 per family, 36 percent below the national
average (see
Exhibit 1-1). The gap has grown wider and wider.
Serigraph Health Care Cost Trend vs National Trend
Serigraph and its people made that happen and learned many lessons along the way. We also learned from innovations at vanguard companies that have informed our health care journey.
Our hope is that our experience will encourage other companies and organizations to empower their employees as informed consumers and responsible patients. If enough payers do so, order will emerge from the chaos in the form of individual responsibility and marketplace disciplines.
Since Serigraph spends about one-third less than the national average for health care per employee, we save more than $1.5 million per year.
Let’s extrapolate those savings. The annual national health care bill is $2.4 trillion, so a one-third reduction would save Americans $800 billion per year. That is enough savings to cover the uninsured in this country many times over. What has taken place on the ground level in our pilot program and elsewhere has major implications for the national health care policy. Ours is a ground-level solution rather than a stratospheric prescription from Washington.
Lastly, I would make a class-action apology for all CEOs. We allowed the mess on the economic side of health care to happen. We did not use the “Golden Rule”—he who has the gold rules. We are the payers, and we let loose the beast of hyper-inflation in health care. We did not trust and empower people to help. We did not put incentives and disincentives into place. We did not create a marketplace, the best form of price discipline. In the absence of strong leadership from business, we defaulted to government to take the lead on pricing policy and procedures.
I have been embarrassed for all of us who should have been in charge. But no more. Many private executives are no longer passive victims and complainants. Instead, we are beginning to manage our health care bills aggressively. Our hope is that Serigraph’s journey toward proactive management of health costs provides a useful road map for others seeking to join us in taming the beast.
