Why Healthcare Costs Rise Faster Than General Inflation Part 1

This is the first of a two-part series on why healthcare cost growth has historically been much higher that general inflation, by David Toomey and Tom Emerick.

If you want to truly understand why corporate health cost have risen faster than nearly everything else the past 40 years read this article. And then you can read the follow-up Part 2 soon to understand a way to impact this opportunity.

In 2001, David was managing large accounts for a major carrier/tpa when the largest hospital system in the market issued a termination notice to begin the negotiation process for a unit cost increase. This began a tumultuous series of negotiations that involved the local press. (When hospitals want a very high fee increase, as a tactic they sometimes start the process by terminating participation in a carrier’s network.) The fee increase was high single digits, above market, and highly inflationary for the area. This system was already paid a premium due to their large market presence, and the requested increase would put them that much farther above the market average of other facilities.

As usual when this happens, David moved quickly to engaged major self-insured clients, and educated them on the cost impact. Their feedback – hold firm as they could not absorb the increases. When asked what steps they would take if this major hospital was not in the network, many responded that they would just add another carrier option, so their employees would not be disrupted! There were no questions by employers on the quality of the hospital’s care or the commitment to process improvement. In short, while they realized they could not really afford the higher prices, they felt employee disruption, even a fairly minor disruption, trumps company profits and affordable payroll deductions. In turn that meant David had no leverage at all in negotiating with the hospital system.

As a result employer and employee health costs were ratcheted up in that market. Too bad, but this story is the norm. We’ve seen this same scenario continuously in our careers. Even if a hospital or clinic is used by less than 5-10% of a company’s employees, getting complaints from employees, even just a few, trumps corporate profits, shareholder returns, rising payroll deductions, restraining rising deductibles, and rising employee out-of-pocket health costs. Even though self-insured employers are the ultimate purchasers of healthcare, they usually just roll over when providers keep hiking their charges year after year.

In every market, by definition, half the providers are below average. While company benefit managers profess to want the best quality care for their employees, they willingly accept larger fee hikes from the worst providers. Why? A few employee complaints have also trumped deleting poor quality providers, ones with a high rate of harming patients. By “harming patients” we mean high rates of misdiagnoses, high rates of prescribing bad or suboptimal treatment plans, and high rates of infections, some of which are deadly.

Sally Welborn, head of benefits for Walmart Stores Inc., recently called for self-insured employers to take the lead in both reforming how providers and paid and making hard value-based purchasing decisions. The term “values” excludes providers with high rates of misdiagnosing patients and giving them profitable but unnecessary treatments.

Soon you can read Part 2 in this series on how employers can attain value from the provider community.

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