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Corporations Are Waking Up to the Health Care Cost Crisis – Are Health Care Organizations Still Asleep?

by Scott MacStravic

Four years ago, a wake-up call for corporate America was published. It predicted that health insurance benefits paid for by employers would reach the level of $10,659 for family coverage by 2008, up from $6656 in 2003. Employees, themselves, would be paying $3942 in 2008, up from $2412 five years before. This presumed the same level of cost sharing as existed at that time and a conservative rate of 10% annual inflation in premiums. [R. Whitmer, et al. “”A Wake Up Call for Corporate America” JOEM 45:9 Sep 2003 916-925]

The same report noted that 50-70% of the expenditures involved were caused by lifestyle factors such as smoking, obesity, poor stress control, lack of fitness, poor nutrition, and poor levels of compliance in managing chronic conditions such as diabetes and hypertension. Despite that percentage level, less than 6% of all expenditures were being devoted to prevention of all kinds, including efforts to influence lifestyle factors.

It is clear that “corporate America” has awakened to the problem, if only slowly and incompletely. A 2007 study has found that 75% of the large employers surveyed were investing in health management initiatives in order to reduce their sickness care costs. In most cases, in fact 86% of all employers surveyed, the returns on investment from these initiatives had not been determined, but the vast majority of them (70%) were confident that they were getting or would get a positive return.

In many cases, this confidence was based on expected gains in employee productivity, thanks to reductions in both absences and productivity impairment at work (“presenteeism”). But the employers surveyed were only measuring sickness care cost reductions so far, and most found even these difficult and expensive to measure. [[K. Capps & J. Harkey “Employee Health & Productivity Management Programs: The Use of Incentives” IncentOne.com 2007]

Insurers and employers that have measured results have tended to find positive returns on their investments, though not necessarily at once. For example, in a disease management effort aimed at diabetes, reported mean blood glucose levels among diabetics dropped by 0.4 in first year, by 0.3 in fifth, and by 0.6 in seventh. In other words, effects were gradual and inconsistent from year to year – but cumulative. The lower blood sugar levels go, i.e. the closer they get to “normal” or “under control” levels, the more sickness care costs will go down, so that by the seventh year, savings would be many times those of the first year. [N. Beaulieu, et al. The Business Case for Diabetes Management at Two Managed Care Organizations” Integrated Benefits Institute 2002 (www.ibiweb.org)]

A disease management supplier has reported that, on average, the ROI levels it has achieved with its clients have been $1.69:1 in the first year; 2.00 in the second, and 2.46 in the third. [“When It Makes Cents to Back Into the 80/20 Rule” Gordian Health Solutions Oct 3, 2005 (www.healthleadersmedia.com)] One of the few employers to follow the same cohort of participants in an employee health management program has reported savings of $233/emp in first year, $375 in second, $944 in third and $950 in fourth. [G. Stave “Quantifiable Impact of the Contract for Health and Wellness” JOEM 45:2 Feb 2003 109-117]

When reports describe the percentage change for multiple years, they have indicated similar patterns, though not always increasing rates each year. For example, when disability days were tracked by one employer, they fell by 23%, in the first year, then 15% in the second, and 38% in the third; while the number of claims dropped by 6%, then 15%, then 49%. [M. Flinton, et al. “How Do You Know Your Disability Program Is Effective? Joint Forum on Health, Productivity, and Absence Management National Business Group on Health Dec 5-8, 2005 (www.businessgrouphealth.org)

Such percentages are cumulative, though not additive. When the first year reduction is 23%, followed by 15% in the next year, and 38% in the third, the total decrease is the multiplied effect of what remains in each year, i.e. (100% — 23%) = 77% x (100% –15%) = 85% x (100% — 38%) = 62%, or .77 x .85 x .62 = 40.5% remaining, or a total reduction of 59.5%. Disability claims had dropped by (.94 x .85 x .51 = 40.7) so 100% — 40.7% = 59.3%, essentially the same amount, though based on a different pattern.

In addition to efforts to reduce the incidence and prevalence of disease, by reducing risks thereof, as well as improving the management of chronic diseases that already exist, insurers and employers are pushing for the elimination of waste in sickness care, and the improvement of its efficiency. Reforms in the way sickness care is delivered could produce decreases in total expenditures ranging from modest to dramatic.

One reformer suggested that we could save $ 20 billion a year by reducing/eliminating errors that hospitals make in delivering sickness care, for example. [S. Spear “Fixing Health Care from the Inside, Today” Harvard Business Review 83:9 Sep 2005 78] Another more ambitious reform proposal predicted a net reduction in health care expenditures equal to 52.2%, merely from improving the operation of the healthcare “system”. [Capturing Value: Increased Efficiency in Health Care” National Institute for Health Care Management Mar 2006 (www.nihcm.org)]

If the demand for health care could be reduced by as much as 50%, and expenditures by 50%, the sickness care system would not be destroyed, but it would be dramatically reduced in size. The overall effect of two 50% reductions would mean resulting sickness care expenditures would be 50% x 50% = 25% of their former levels. But it is clear that the sickness care system is not behaving as if anything like this will actually happen.

Despite the fact that both the American Medical Association and the American Hospital Association are committed (rhetorically, at least) to promoting the health of the community, the sickness care system is clearly planning for a big increase in demand and expenditures. Hospitals are building new and expanding old facilities throughout the country, while physician organizations call for dramatic increases in the physician supply, and the opening of new medical schools.

This is a clear disconnect, though perhaps an understandable one. Providers have naturally watched past patterns of steadily increasing demand and expenditures, and projected them forward to yield forecasts of dramatic increase in both. The effects of the growing investments in prevention and health/disease management have barely been measured so far, and have not much diminished growth patterns yet.

But as insurers, employers, and governments slowly catch on, identify which prevention strategies yield the greatest savings, and adopt them more aggressively, the disconnect may switch from a philosophical one to a significant gap between the demand and expenditures that providers are counting on and what will actually occur. Moreover, a strong case can be made that the “community benefit” mission and legal commitments of most hospitals, and the professional values of most physicians, should drive them to participate in the effort to improve the health of Americans far more vigorously than they have in the past.

The corporate world, and even federal and state governments have awakened already to the value, indeed the necessity of managing health in order to reduce the costs of sickness. Perhaps it is time that sickness care providers do the same – as employers, themselves, who face the same necessity for controlling their costs, and as providers who are supposed to be in the health, as well as the sickness business.