What Should Employers Do about Health Care?

Companies that cut health care costs without improving the overall value of care eventually pay a price in terms of employee absenteeism and chronic ailments. According to Harvard University professor and strategy expert Michael E. Porter and coauthors, the best way to truly reduce health care costs is to improve quality.
by Michael E. Porter, Elizabeth O. Teisberg & Scott Wallace

In the United States, employers have often treated health benefits as a necessary evil. They have focused on the rising cost of providing health insurance benefits and taken aggressive steps to bring costs down, or at least to slow the rate of increase.

In many other countries, employers have ignored health care altogether, leaving it to government or dutifully paying their mandated health contributions. Many U.S. employers are dropping health benefits or hoping for reforms that will transfer responsibility for health insurance to individuals or to the government.

Think again. Employers cannot get out of health care, no matter what kind of health insurance system is put in place. They bear the cost of poor health in the form of sick days, absenteeism, reduced productivity at work, and early retirements of skilled contributors. Recent internal company studies in the United States estimate that employers spend 200 to 300 percent more on the indirect costs of poor health than they do on health benefits. The costs of poor health are especially high for chronic conditions such as diabetes, migraines, heart disease, and respiratory problems. These costs remain even if employers get out of health insurance obligations. But by disengaging, employers lose much of their ability to influence the costs of poor health.

This is what many European companies have discovered. In Sweden, for example, excessive rates of absenteeism in the 1980s caused many companies seriously to focus on increasing employee attendance and productivity through comprehensive health and wellness programs.

What is the best way for employers to address their health benefits issues? Here again, fuzzy thinking has made the problem worse. In every other aspect of their business, employers are attuned to quality and value. But health care has been treated as a commodity and cost reduction has been the dominant approach.

Employers have gone to their vendors, health plans, or third-party administrators in the case of self insured plans, and tried to bargain the maximum discounts. They have switched plans frequently in search of a better deal, which has meant that their employees needed to switch as well. They have tried to pare back covered services, thrown up barriers to expensive drugs and treatments, and recently, begun to pass more and more costs on to employees.

Yet health benefit costs have continued to go up. Most employers do not even measure the costs of poor health among their employees. If they did, however, they would discover that many of the steps they have taken to reduce benefit costs have actually made the costs of poor health even greater. For example, studies have shown that co-pays and deductibles on essential medications for chronic conditions can reduce adherence to therapy, leading to expensive hospitalizations, complications, and the like. Here, so-called consumer-driven health plans not only failed to benefit the consumer, but they hurt employers as well.

“Employers must expect health plans to direct patients to excellent providers, not those provider networks that offer the biggest discounts.”

What to do? The most important single change necessary is for employers to think about health care in terms of value, not cost. Value is the health outcomes achieved for the money spent. Cost includes not only the immediate, short-term costs of treatment but the long-term costs of ongoing care as well as the indirect cost of poor health. The goal should be to increase value, not reduce the short-term costs of health benefits. New research on value-based health care delivery reveals some powerful, and ultimately optimistic, principles.

First, the best way truly to reduce health care cost is to improve its quality—better diagnoses, more timely treatment, less invasive methods, getting the right treatment to the right patient, fewer complications, and so on. Quality, defined in terms of outcomes, is the secret to success in health care.

Second, high-value care is delivered by integrated practice units including all the needed specialties that care for the patient's medical condition over the full cycle of care, not the current model organized and paid for by specialty and discrete interventions.

Third, prevention and screening can dramatically improve value, as does ongoing disease management to prevent recurrences and setbacks.

Fourth, the only way truly to drive value is to measure patient outcomes for each medical condition, and get patients to providers who have the scale, experience, teams and facilities to achieve excellent results.

To move to a value-based approach to employee health benefits, employers must take a number of essential steps. The first is to mount an aggressive approach to wellness, prevention, screening, and active management of chronic conditions. Here, many employers in the United States and Europe have made impressive starts. Some companies cover the costs of smoking cessation and weight loss programs, or reward participation in health and risk assessment screenings. To encourage healthy lifestyle choices, employers offer fitness programs and healthy menu choices in company cafeterias, sometimes at lower prices than the less healthy alternatives. To promote screening and management of chronic conditions, employers are moving to on-site clinics to enable convenient vaccinations, convenient ongoing monitoring, and care for routine health issues. On-site physical therapists offer coaching to prevent injury and services to speed recovery. On-site diabetes educators work with groups of employees to engage them in lifestyle changes that prevent disease progression. Co-payments are eliminated for medications and services used to treat chronic conditions. Companies are tracking the ROIs of these investments in health with good results. These kinds of health and wellness initiatives are a great place to start. And, they are not enough.

Second, employers need to directly engage in improving the structure of health care delivery, and thus its quality. This begins with redefining relationships with health plans away from cost reduction and discounts to quality and value. Employers must expect health plans to direct patients to excellent providers, not those provider networks that offer the biggest discounts. Employers need health plans to encourage integrated practice units, and assemble comprehensive health information for members. Today's practice of paying health plan administrators a percentage of the company's health care costs undermines value, as does restricting provider networks based on the size of discounts. Some employers are already contracting directly with integrated provider organizations for care of complex conditions such as cancer, organ failure, heart disease, or diabetes. They should expect their health plans to do so as well. In Germany, for example, a sick fund and a hospital worked together to create an integrated practice unit for migraine care. In the first six months, absenteeism for migraine sufferers was reduced from 57 percent who missed a week of work or more per year to 11 percent.

Third, employers need to drive outcome measurement throughout the system. Business leaders know that what is measured will improve. A critical step is to expect outcome measurement by providers for each medical condition, adjusted for patient population. Over time, outcome measures should be defined and collected as a matter of national policy. Employers can no longer be satisfied with current process compliance measures and overly broad metrics covering hospitals as a whole. What is needed is true outcomes, medical condition by medical condition, that will guide choice of providers and enable clinicians to improve. Employers must also expect that health plans and health plan administrators measure and improve their health results for plan members.

Fourth, employers must accelerate change in reimbursement to link financial success to clinical success. Today, providers are paid by visit, by specialty, and by procedure, or through diagnosis-related groups (DRGs) that are too narrow to encompass the necessary care. Reimbursement must shift to bundled payments covering the total care of the patient's medical condition, including all the specialties and services involved. Only in this way is reimbursement aligned with value, and rewards providers for innovations that improve health and reduce the need for more care or more complex care. In the United States, employers may need to contract directly with providers if health plans are slow to modify their flawed contracting practices. Worldwide, employers should support efforts to realign payment systems with value.

It is high time for employers to stop complaining about health care and modify their own practices that are perpetuating the system's problems. Employers' interests and employees' interests are closely aligned around a common goal when it comes to health care—better health. Employers have a strategic role to play in improving value in the health care system. Rather than disenfranchising employers, policymakers would be well advised to harness this role. Employers, for their part, need to recognize their fundamental interest in the health of their employees and act on it.

About the Author

Elizabeth O. Teisberg is a tenured faculty member of the University of Virginia, in the Darden Graduate School of Business.

Scott Wallace is a Batten Fellow at the Darden Graduate School of Business.