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Hmmm ... New Alliance Targets Healthcare Costs

February 8, 2016

 

According to a recent Wall Street Journal article  (http://www.wsj.com/articles/companies-form-health-insurance-alliance-1454633281) twenty major companies are banding together to use their collective data and market power in a bid to hold down the cost of providing employees with healthcare benefits. Essentially companies the likes of Coca-Cola, American Express, and Verizon are admitting that they may not be able to continue to provide health benefits unless they dramatically shake up the way they do it. In other words, they are admitting that the annual ritual of shopping their health benefit plan, changing the plan, or changing the contributions to the plan is no longer enough.

 

I think the most promising aspect of this announcement is the fact that the process is going to be data-driven. The alliance is going to share information about employee health spending and outcomes in order to foster greater cost transparency and a deeper understanding of the healthcare supply chain. This is a good first step and I for one will be very interested to follow the progress of this alliance.

 

However, there were a couple of major red flags in the announcement as well. First, the alliance's strategy seems to continue to focus on the elements of the healthcare supply chain that are not the root cause of unsustainable healthcare costs. Second, there is a pronounced lack of focus on healthcare consumerism in the strategy, and in fact seems to maintain the traditional paternalistic view of the employer purchasing benefits on behalf of employees.

 

Let's look at these issues in a bit more detail.

 

Healthcare Supply Chain

 

There is a very simple formula that gets to the bottom of how healthcare insurance premiums are calculated:

Unit Cost * Unit Volume + Expenses = Premium

Unit cost is the allowable charges that are paid to healthcare providers, unit volume is how many claims against the plan are incurred, and expenses are the cost of administering the health plan including network costs, claims processing, pharmacy management, disease management, benefit administration, and more.

 

Virtually every employer sponsored health plan has been focused on the unit cost and expenses variables in this equation for a long time now, and the alliance seems to double down on this approach. Clearly the market power of the alliance can be leveraged to squeeze the provider a bit more and lower the unit cost variable incrementally. And surely the alliance can drive the myriad of health plan administrators to become more efficient and incrementally lower their costs and profits. But the elephant in the room is still the unit volume variable. Until we can figure out how to meaningfully reduce the number of times plan members utilize the health plan through prevention and avoidance, we will be stuck with incremental improvements in cost and outcomes. 

 

Healthcare Consumerism

 

We have to get the consumer back in the middle of the healthcare supply change in order to fundamentally change the cost equation. That's why it is a bit concerning when the ultimate goal of the alliance may be to morph into a cooperative of sorts that purchases healthcare services "on behalf of employees". I'd much rather see the stated goal of the alliance be turning every one of the 4 million employees associated with alliance companies into a smart healthcare consumer. So instead of the alliance companies understanding which treatments and health providers had better outcomes, how about empowering all 4 million employees to understand cost transparency, the importance of preventive care and lifestyle habits, and their prospective health risks.  The American consumer, when provided with the right information, is the most powerful force there is in lowering costs in any industry. It can work in healthcare too.

 

The Health Transformation Alliance is a very interesting development in employer sponsored health benefits and one that I will be following closely to determine if it is just a negotiating tactic or if it represents a fundamental shift in how healthcare is purchased and used. In my view, without a central focus on prevention and healthcare consumerism, this effort will fall short of the stated goal of dramatically shaking up the way employers provide health benefits to their employees so that this type of coverage can continue.

 

Bob Blonchek is CEO and President of Digital Health Innovations, Inc. and the creator of HealthJibe a connected, mobile consumer health empowerment solution.

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