Making Health Care Cost Increases “Ouchless” for Employers

When I was growing up on the farm back in Nebraska, it seems like we got more cuts, nicks and scrapes than the typical kid. Back then, if you used a band-aid, getting it off was a real pain… and I mean that literally. Some kinds were even called “super-stick” and they sure did. Thankfully, the industry listened to consumers (they may have heard some of us screaming), innovated their product offerings, and improved their product quality so they could get the adhesion needed but with removal that might even be considered “ouchless”.

Back in the day, band-aids cost about a penny each. Today, you can get a much better product for about 10 cents each (except I kind of miss those tins they use to come in). Considering the cost of innovation and adjusting for inflation, it’s remarkable that the cost of these basic health care supplies is actually only slightly higher than was 50 years ago. Innovation and productivity work. Competition works.

While consumers are receiving the best health care supplies in the world at a reasonable price, employers are experiencing something much different. The average annual health benefit premium for family coverage was $13,375 in 2009 and has been increasing every year for the last ten years at an average rate of 8.7%. That means that in a mere 10 years, the annual premium for a family will be $30,800. That’s not good news for any of us.

So, what can an employer do about the rising cost of health care? Considering they write the check for the majority of health care premiums: plenty. Over recent times, many employers have felt that managing health care costs was not core to their business model and so they outsourced it to companies for whom it was core. There’s really no problem with that strategy. It makes a lot of sense. If you’re a maker of toys or confectionery products or run a packaging company, why should you spend valuable time and resources trying to wade through the ins and outs of the latest changes to HIPAA laws? But when companies outsourced the process, they also inadvertently removed the pressure and incentives for innovation and productivity. When that happens, costs escalate over time.

A few progressive companies are bending the trend in health care costs by reasserting their control over these processes and demanding higher quality at a lower cost. The ones that have done so have used strategies focused on redesigning the employer-insurer-provider-employee health care “supply chain” so they can pull out enormous costs, improve the quality of care for their employees, and reduce that 8.7% inflation rate back down to something more normal. And it’s working for them.

If more employers would do the same they could bend the trend even more. America’s companies know innovation and productivity and are equipped to meet many of the challenges of rising health care costs. When (hopefully, not “if”) they decide once again to focus their considerable capabilities back on this part of their business model and strategically redesign for better cost control, rate increases will come down. We might even be able to make it “ouchless”.

(A high level situation analysis regarding health care costs from an employer’s perspective is available here.)