Why Healthcare Costs Rise Faster Than General Inflation Part 6

By David Toomey and Tom Emerick


In most healthcare discussions today, “the exchange” is usually referenced as a solution to address the employers’ health and cost challenges. The exchange model is now being offered by carriers, by consulting firms, and by independent companies. Per Accenture, the enrollment in private exchanges have exceeded 6M in 2015, and it’s projected to be at 40M by 2018.

Since the age of consumerism began back in the early ‘90’s, the theory has been that if we can transform employees into consumers of healthcare services, the free market will drive out the price variation amongst the providers as patients question the cost of services. As more employers have increased deductibles, many are still waiting for their employees to become a healthcare consumer. The reality is that healthcare is complex, so individuals are challenged with deciphering the medical terminology and obtaining the actual price for a specific service, especially when majority of people access the healthcare system infrequently. So is the exchange the answer for consumerism to take hold?

At a recent exchange conference, there were national experts discussing the impact of the exchanges. After hearing the various messaging and the statistics from the presenters, it became clearer that the value of the private exchange is basically an administrative platform designed to give individuals plan and program choices, so they can make the right decisions based on their needs. Now the concept of giving employees’ choices and allowing them to make a personalized decision is not new–cafeteria plans have been around for 25+ years.

Cafeteria plans in the 90’s had some big problems. The main problem was serious adverse selection between the plans. When you have big bills planned, you switch to the “richest” plan, and then switch to a low cost option later. When this happens, the “sponsor” gets shorted on payroll deductions as well the spread of the costs amongst those not using services. It will be interesting to see if the exchanges have a better design these days.

When questions were posed to the exchange experts on whether the data was showing an impact to the healthcare decisions and to the health of the population, the consistent response—we’re not sure. Now cafeteria plans/exchanges can serve a purpose when an employer is interested in giving a diverse employee population choices. It’s important not to get caught up in the marketing that an administrative platform is going to solve the healthcare challenges confronting employers today. As we discussed in Part 5 of this series, the marketing around value-based contracts/ACOs has also positioned that concept as a solution, when in reality, performance contracts with provider have also been around for 25+ years.

Employers continue to be faced with about 8% of their population consuming 80% of the total spend, and there is a new 8% every 12-18 months. Is it time to get back to the basics? Should the focus be on finding the right physicians committed to delivering evidence-based healthcare, and then ensuring that patients are accessing care from these providers? When providers see that employers are truly committed to supply chain management, we can expect the process of care to change significantly, and there will be a commitment to removing the non-value added waste from the system. As with many other industries, the ultimate purchaser has the ultimate power by working with the interested suppliers to improve the process and to impact quality and costs.


Tom Emerick and David Toomey are founders of Thera Advisors. Their focus is to help employers maximize their role as the purchaser of healthcare services in working with suppliers to impact their population’s health and to lower costs.

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