How to Rein in Runaway Health Costs in Your Company

In November, I was able to stand up in front of our 520 co-workers at Serigraph Inc. and inform them that there would be no premium increases for healthcare in 2014. That was the seventh time in 11 years that we have pulled off that minor miracle together.

The engagement and focus of our employees, coupled with aggressive management, has resulted in a slowed growth in health costs over the last decade at my company, less than 3% per year on average. That compares to double digit annual increases at many companies and a long-term inflationary trend of 7% to 8% in the U.S.

At $9,000 in total healthcare costs per employee for a generous health plan, Serigraph is operating 40% below the national average. We are not alone. Other best-practice companies are also operating in the $8,000 to $10,000 range.

A growing group of vanguard companies is changing the business model for the delivery of healthcare in America. They include major corporate leaders like Safeway, which contained its health costs increases to 2% over a seven years period, and IBM, which has focused on primary care in medical homes to keep its inflation to zero percent over a ten-year span. They have proven that the country’s hyperinflation curve can be bent. A good example is Harry Quadracci, who saw business trends coming before most.

The founder of QuadGraphics, the nation’s second largest printer, didn’t like how health care was being delivered two decades ago, so he set up QuadMed to provide proactive primary care on-site. It was the precursor of what has become known as a medical home.

“We’ll keep you well, and, by the way, if you get sick, we’ll take care of you,” he said at the time. It was diametrically opposite to the reactive, fix-you-when-you-are-broken business model that large hospital corporations have developed in the country.

His average health costs were about $3,000 per employee in 1991, about even with the Midwest average. In 2010, he was spending about $8,800 per employee, about 26% lower than the Midwest average.

His disruptive new model for the delivery of care worked, and now QuadMed provides 40 contracted on-site clinics for other large employers, such as Briggs & Stratton, MillerCoors, Northwestern Mutual Life, Kohler, Rockwell, Greenheck Fan, Safeway, Stihl, Domtar and Shaw Industries. The QuadMed subsidiary is struggling to keep up with the demand.

Joel Quadracci, who took over as CEO from his late father, observed, “Who would have thought that health care would become a competitive advantage for a printing company?”

There are huge savings to be mined in health care. It is a sector rife with waste, inefficiency, misaligned incentives and chaotic pricing. Many out-of-control health plans exceed $20,000 per employee, especially in the public sector, and some plans, often plans bargained by unions, exceed the ObamaCare “Cadillac” level of $27,500. That’s three times what best practice companies are paying for full health benefits.

The cost savings happen only when CEOs walk the talk (“My employees are my most valuable asset.”) and make workforce health and health costs a strategic priority.

Fortunately, CEOs are coming belatedly to the realization that health costs are indeed strategic in nature and that they can be managed. Once engaged, they can move quickly to reengineer their healthcare models. Collectively, their pragmatic initiatives constitute what I call “real” healthcare reform.

What’s happening in the private sector is a grassroots revolution. It is transformation from the bottom up, company by company, employee by employee or consumer by consumer. CEOs are proving that reform is more about management science than political science.

How are the companies producing such stunning results? They are deploying four main strategies or platforms, with lots of moving parts underneath.

The first is a rush to self-insurance. More than nine out of ten corporations with more than 5,000 employees are now self-insured. They take on most of the risk. Tellingly, most health insurers and providers self-insure for their own employees. This shift amounts to disintermediation of the health plans that used to underwrite the risk. Companies with as few as 25 employees are now self-insuring. Some 60% of private employees are now in self-insured plans. Call it a stampede.

Why is it happening so fast? These companies want to control their own destinies for health care. They want the savings from innovative management and don’t want to be in insured pools with slower moving employers.

Second, they are putting incentives and disincentives into place to encourage intelligent consumerism. That means high deductible plans offset by personal health accounts, mainly Health Savings Accounts, which have only been around for ten years.

Sixty percent of all employers now deploy consumer-driven health plans (CDHP), and the ranks are growing at 20% or more per year. By the end of the decade, it will be game over, almost all private payers having done CDHP. That prairie fire has created an estimated army of healthcare consumers at more than 50 million strong.

Why did it move so fast? Because behaviors change and costs plummet when CEOs put the dollars into the hands of their competent employees and ask them to co-manage the health strategy. Five major studies put the savings at 20% to 30%. It’s the incentives, stupid!

Third, private company executives are saying “time out” to the chaotic pricing in the healthcare arena, where charges for procedures routinely vary up to 400%. You can pay $27,500 for a hip replacement or as much as $100,000, $1,500 for a colonoscopy or $9,000. Why would any rational purchaser pay more than the lower prices, when there is zero correlation between price and quality? (Actually, there is a growing inverse correlation: cheaper is better.)

So, private sectors are demanding these pieces of reform: transparent prices and quality, bundled prices for procedures, Medicare-plus prices and caps on charges, known as “referenced-based pricing.” Serigraph pays $27,500 for joint replacements, often with warranties from the best hospitals in the state. The average in the Milwaukee region is about $43,000.

Fourth, corporations are moving en masse to take back the front end of the healthcare supply chain. They are installing on-site primary care clinics for their people. Those holistic medical homes deliver relationship-based medicine, and, again, costs plummet. More than one-quarter of large employees now have their own clinics. Mid-size employees like Serigraph contract for part time clinics.

In effect, they are disintegrating the vertically integrated, often oligopolistic, business models created by large hospital corporations. Why is this reform moving so swiftly? Several decades of pragmatic experience with on-site proactive care have proved that the savings run 20% to 30%. The on-site primary care clinics get there by dramatically improving workforce health and by acting as gatekeepers to the expensive health care supply chain.

If CEOs lead the way, the four platforms produce transformative results. What’s not to like in the disruptive new business model?

John Torinus is the chairman of Serigraph, a West Bend, WI-based decorative, functional and brand related graphics provider for a wide range of consumer and industrial provider including point-of-purchase and promotional applications. He is the author of two books: “The Company That Solved Health Care,” and the forthcoming “Grassroots Healthcare Revolution.”