New business models tame health care hyperinflation

Health care inflation in the Milwaukee area has dropped from double-digit to single-digit percentages, and there’s no big mystery why.

Some guess that its the dampening effects of the stuttering economy that has reduced health care spending. That may be part of it.

But, in my view from the trenches, here’s the real reason: there is a thundering stampede in the private sector toward real reforms of the failed business model for the delivery of health care. It’s reform from the bottom up versus mandates from the mandarins in Washington D.C. It’s all about pragmatic solutions to the root cause problem: costs that have screamed upward for four decades, recession or no recession.

The telling statistics are spelled out in the 10th rendition of HCTrends, an analysis put together by Pewaukee-based Benefits Services Group that probes Milwaukee area health care delivery. The increases in 2012 are expected to be in the 5% to 7% range, compared to a high point of 17% in 2004 and 8% to 10% in 2011. That’s huge progress.

Here are some its key findings that contributed to the bending of the inflation trend line:

• About half of the employers surveyed offer a consumer-driven plan, 35% with a Health Savings Account (HSA) and 12% with a Health Reimbursement Arrangement (HRA). Incentives aren’t everything when it comes to human behavior, but engaging employees in managing costs makes a profound difference in how health care dollars are spent.

• Three-quarters of large employers now offer disease management programs. It’s the old 80-20 rule. One-fifth of the employees and spouses, those with chronic conditions, spend 80% of health care dollars. Companies have learned that they can’t manage health costs if they don’t manage health.

• Milwaukee area providers, under intense pressure from CEOs of private companies, have corralled their costs. Average medical costs dropped from 10 points over the Midwest average in 2003 to three points over in 2012. HCTrends singled out Aurora Health Care for leading the way by constraining its operating cost increase to only 17% over a seven-year period, far below the national average.

• A majority of employers now offer wellness plans and annual health risk assessments. For health care employers, who ought to know a thing or two about best practices, it’s 81%.

None of this progress has dented the national debate about health care. The presidential candidates are still mouthing sound bites that have little to do with real reform. Obamacare deals with some of the national access issue for the uninsured, but, all spin to the contrary, will raise not lower overall costs.

Republicans want to “repeal and replace,” but, with the exception of Rep. Paul Ryan of Wisconsin, have no visible or specific replacement strategy. They oppose, but don’t propose.

Beyond what HCTrends reported, there are other break-outs toward a better business model:

• More than one-quarter of the larger employers have taken back the front end of the supply chain by installing their own proactive primary care clinics on site. In the Milwaukee area, that includes QuadGraphics, Briggs&Stratton, NML, MillerCoors, the three Wendorff companies in Hartford, Serigraph and Steinhafels. Kohler has contracted with QuadMed as well. This reform is sweeping the country.

• Transparency on prices and quality is becoming more available as the army of consumers grows. There were 13.5 million HSAs in early 2012, up from 11.4 million a year earlier. Entrepreneurial companies are now putting a consumerism spotlight on the value proposition in terms of price and quality ratings.

• Some private payers are negotiating for bundled prices for procedures. One has secured warranties for surgeries. The all-in prices for an episode of care are the ultimate in transparency. Goodbye to incomprehensible bills and uninformed choices of providers.

• Enlightened providers, who understand that the old trend lines on costs are unsustainable, are adopting lean disciplines to engage their employees in wringing out mountains of waste from their operations. Private payers are shifting their business to those lean providers.

Public sector payers have been slow to join the stampede. It’s not their money. But, under excruciating fiscal pressure, some school districts and some counties have begun to manage their previously unmanaged health plans. Once the public sector figures out what is happening in the private sector and how much money can be saved with innovative management of benefits, they will move and the inflation rate will slow even more.

Could there be deflation – lower costs – down the road as management disciplines take hold?

HCTrends put the health cost per employee in the Milwaukee public sector at $13,466, in the private sector at $11,901. Best practice in full, well-managed plans in private companies runs between $8,000 and $9,000. There’s lots of room for further reduction in the averages.

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