Companies hold health inflation to 2%

Tom Doney, an old hand in the health plan and network discount business, has 421 self-insured employer clients in 50 states that are proving health costs can be held to 2% annual increases.

That track record for his Cypress health plan clients contrasts to average annual increases of 7% across the country in the eight years from 2007 to 2014.

Thomas J. Doney, President of Cypress Benefit Administrators

Thomas J. Doney, President of Cypress Benefit Administrators

The clients of Appleton-based spent $9,186 per employee in 2014, including drugs and dental, compared to an U.S. average of $14,357 per year (derived from three national consultants).

That’s a staggering 34% saving — more than $5000 per year.

For a company with 200 workers, that brings a cost reduction of more than $1 million.

How can that be?

For starters, Doney, who has been running his entrepreneurial health plan since 2000, is a skeptic on the subject of network discounts. He says they vary only slightly from Anthem to United Health Care to Humana to small health plans like his.

Nonetheless, in today’s broken business model for the delivery of care, networks and their discounts, which vary wildly at the procedure level, are still necessary for companies buying care.

Cypress uses a combination of the Trilogy and HPS networks, both Wisconsin entrepreneurial ventures. (HPS offers prompt payment to hospital corporations in return for a few more points of discount.)

But the world of the health plans is changing. Employers who underwrite their own risks for health costs are doing what the big health plans used to do.
Further, many private employers are moving to on-site primary care, meaning they are paying a flat fee per employee. That eliminates the networks and their discounts on that part of the medical care spectrum.

Similarly, self-insured employers are moving to direct contracts and bundled payments for expensive elective procedures. They are jumping right over the discount networks to a flat fee — $28,000 in the Milwaukee region for a joint replacement. Average cost via the networks is about $45,000.

Of note, the providers that offer low bundled prices often offer warranties on their surgeries. Any re-do is on them, as it should be.

Cypress sets itself apart by its flexibility on all those innovations. Its customers, like Menasha Corp., Boldt Co. and Keller, can mix and match modules for the best results. Those include other modules like price and quality transparency, chronic disease management and drug management. They help employees buy smart, they promote health and they keep people out of hospitals.

The Cypress numbers should be cause for optimism for employers, private and public, some of whom are looking aghast at per employee costs that top the Cadillac level of $27,500 per year. That’s double what Cypress clients pay, and arguably, the Cypress plans offer better care. Cheaper is undeniably better.

Doney voices one pessimistic note. He said drugs now account for 22% of the total medical bill for his customers. New drugs have driven up that part of the health expense from 10% – 12% a few years back.

He said some projections put drug costs at 35% within five years, inflamed by new drug patents. Even innovative payers have not found workable solutions to control the hyperinflation for novel pharmaceuticals.

That conundrum – drug costs that offset deflation on the main body of medical costs – explains why price controls on pharmaceuticals has become a national political issue.

I prefer innovative management and market disciplines to government price controls, but drugs at $100,000 or more per year may necessitate the latter.

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  • David Newby

    There is another issue re rising drug prices. While the text of the Trans Pacific Partnership is still secret, information from Wikileaks indicates that the US Trade Representative is pushing hard for longer patents on prescription drugs. The longer we have to wait for generic versions, the higher overall drug prices will be. Pharmaceutical companies and their trade association are extremely powerful among the 600 some corporate advisors to the US Trade Representative. There are no other countervailing voices at the table (the 15 or so union and environmental and civil society representatives have less access to negotiating texts and no real voice at the negotiating table). If business were to exercise its power in these negotiations, extending these patents might be withdrawn from the negotiations, especially since some countries, especially those with universal health care plans which negotiate drug prices (like Australia) are resisting pressure from the US for this extension. And you can imagine how higher drug prices would affect countries in the TPP negotiations such as Malaysia, Vietnam, Peru, Chile, and even Singapore. There are also indications that the TPP would prohibit countries from negotiating lower drug prices with pharmaceutical companies (as is currently done by the VA, for example). I suspect some readers of this blog could have an effect on this issue if they contacted/lobbied the US Trade Representative and especially the US Chamber of Commerce. Don’t procrastinate: negotiations are nearly complete on the TPP. After negotiations are finished, Congress cannot change its provisions (except by rejecting the trade treaty completely–which might not be such a bad idea, if you are familiar with other provisions in the draft agreement!).

    • JohnTorinus

      Did not know this stuff. Agree completely that we need counter-vailing power against the drug companies. I don’t buy their argument that they need to charge $100,000 a year for drugs so they can support further R&D.

      • David Newby

        Then get your friends together and get busy, John! Not much time left!

        • JohnTorinus

          Journalists don’t have friends.

          • David Newby

            Baloney! You have many powerful friends… (I’ve even met a couple of them!)

  • Abett

    And neither is Medicare allowed to negotiate drug prices. Imagine that is this country! So much for the free market.