Is Corporate USA Underestimating the Need (and Opportunity) for Healthcare Transformation?

Many companies are overlooking just how much they are bleeding out through insufficient and ineffective governance of healthcare. Why “now” is the time to do something

Healthcare cost governance should be one of the critical issues for corporate America, given that it represents the second largest “people” cost after payroll, and faces YOY trend increases of around 6 percent. But while some of the more progressive organizations have established a Center of Excellence approach to manage this cost relative to outcomes, many would be surprised to find just how much opportunity they are overlooking. 

That, at least, is the opinion of Jim Arnold who, after a career focused on eliminating errors, duplications and oversights in Accounts Payable (he launched and sold APEX Analytix), has turned his attention to the governance of healthcare. With benefit plan costs rising at 6 percent plus, and unlikely to slow down, the potential for reaping savings, Arnold believes, “is truly significant" for those willing to take it on. “At its simplest, we are talking about a procure-to-pay process,” he says. “It's about effectively transforming inefficient supply chains. We see it everywhere across enterprises, and healthcare payments is no different.”

It's not just about workplace wellness policies, healthcare coalitions, direct negotiation, or COE-based approaches. Arnold sees the real opportunity in data mining and analytics to identify inefficiencies. "I think this is ultimately the gold mine for healthcare cost governance. Today, organizations have easy access to a vast array of big data, both internal as well as external to the corporation, and can make smarter choices around health programs and providers,” he says.

While global corporations have been mining data for years to try to predict the future, and finance services have certainly been a front runner in the use of analytics to identify erroneous or inefficient transactions, this approach is only haphazardly being applied to healthcare cost governance – despite the obvious opportunity it presents.

"The three main opportunities to limit waste that we see are billing errors, above market prices, and administrative waste," explains Arnold, adding that according to Medicare CERTS testing (in 2015), healthcare bills have an error rate of 12.1 percent, on average. “Transparency is the rule of the day and healthcare costs are no longer an exception.” As an example, Arnold cites the fact that Medicare pays $36 per Relative Value Unit compared to corporate plans around $80 per RVU. Arnold argues that corporations should track a ‘healthcare waste index’ that would quantify the proportion of waste within healthcare expenditure and provide transparency to support smarter decision-making across the healthcare supply chain.

The risk of what you might broadly call overpayment is exacerbated as health systems are becoming more sophisticated and schooled in the art of revenue cycle management. While not necessarily or even implicitly detrimental to healthcare cost stewardship, these strategies do challenge the enterprise’s desire for quality care at competitive cost.

Who is Safeguarding Healthcare Spend?

So, who is safeguarding corporate healthcare dollars – and how? According to Arnold, only about 10% of corporations today are already retaining and maintaining their own health care claims data in-house. "These are financial records and should be treated as such by corporations," says Arnold.  The obvious culprit, he says, is where a Third Party Administrator [TPA] has insufficient external governance from their client. "Many Benefits Heads are relying on TPAs running their own audits," he explains, “but the TPA’s are financially disincented from performing effective audits. Every dollar that they spend on an audit is one less dollar of profit they make, AND more importantly, they are very reluctant to communicate errors that THEY made with YOUR healthcare checkbook.  At the end of the day, TPA’s are beholden to their shareholders to maximize profits & retain long term client relationships.  I've seen time and again where these kinds of audits just don't identify true waste.”

Key areas that represent red flags for corporations include medical loss ratios, variation in costs for same procedures, emergency room visits, and audits. “In self-insured plans, TPAs lack motivation for rigorous post auditing of provider bills," says Arnold. He also feels strongly that “boosting healthy outcomes for employees and their families” is every bit as important as the cost aspect.  “Companies like Boeing are holding medical providers / health systems accountable on quality and health outcomes in addition to cost targets, just as they would for landing gear, engines and jet way equipment”.

What most practitioners agree on is that healthcare governance requires the kind of sophisticated level of management that corporations are recruiting and fostering today for their strategic growth, as well as functional support areas. It's a strategy and a way of thinking that shared services leaders will be familiar with.

Healthcare Provision as “Shared” Service

Ned Holland, recently retired Assistant Secretary for Administration for the United States Department of Health and Human Services (HHS), has bought healthcare at three different Fortune 500 companies over the course of his career [to the tune, in one case, of half a billion dollars per year], and says that he has always seen healthcare provision as a shared services, “in its truest sense". 

The concept of monitoring, accountability, and price-to-outcome comparison is key to effective healthcare cost governance, Holland explains. These elements were all put into practice during his tenure at HHS, where his senior leadership role included managing the SSC – called Program Support Center – and where he launched a pilot called FedStrive, an integrated employee health, wellness, and work/life balance program replicated at several other federal departments based on its preliminary success at HHS. 

Holland emphasizes that due to its complexity, the management of healthcare benefits is not something that can easily be handed over to a normal supply-chain-management function, however. "It was an idea that came up at Sprint, where I headed Compensation, Benefits, Labor and Employee Relations, but it was one that was very quickly laid to rest again," he explains. "Healthcare cost is far too sensitive to be handed over to a supply chain without healthcare expertise".

Holland is adamant, however, that most major companies are doing a good job in governing what is, after all, a critical cost. “The complexity about the planning, pricing, and implementation of plans is such that its responsibility often falls just a level or so beneath the CFO,” he explains. “And there's nothing that is more accountable than reporting on benefits costs to a CFO (and the CEO). So it's unlikely that corporate America is overlooking significant waste in its healthcare benefits.”

What’s important, Holland warns, is to have a Center of Excellence approach to cost management – in healthcare as for any other payables function. Entrusting healthcare cost audits to external Third Party Administrators is a shortsighted strategy, he agrees: "We always ran regular audits engaging appropriate external experts in cooperation with our internal auditor. It’s not something you should be asking the actual outside paying function to report on."

The challenge, Holland concludes, is that, while healthcare governance is no doubt highly fragmented right now, there are bound to be opportunities for improvement – “certainly in businesses run by multi-hatted executives, without the necessary specialist healthcare expertise, where ‘gaps’ are due to management inexperience within this particular field.”

It could be that the challenge facing corporations is that much greater, however.

Framing the Opportunity

Mark Jamilkowski , a Managing Director in the Healthcare Advisory group at KPMG, and a health actuary, specializes in healthcare reform strategy, accountable care, enterprise risk management, and associated financial reporting, planning and forecasting. He agrees that healthcare transformation has never been more important than now, and strong governance is needed. However, focusing on the cost aspect of the benefit plan is only a part of the story, he says. While corporate cultures may be focused on meeting healthcare budget targets or goals related to cutting cost this focus does not readily acknowledge or directly manage the impact on workforce productivity as a result of disease, for example. 

There can be some misconception between effective healthcare management and effective plan governance, he warns. There is a disconnect, perhaps even disinterest, on the part of self-insured corporations in managing healthcare costs to the same standards the industry is expecting of modern-day hospital and provider-based businesses, Jamilkowski says. Further, while there are sporadic efforts from HR Outsourcing-type firms that purport to provide cost control, “it's easy to confuse managing premium costs with good healthcare management”.

As noted by Holland, Jamilkowski agrees that it is difficult to task the Third Party Administrators that most self-insured corporations rely on to administer their healthcare plans with accountability for comprehensive disease management and care management. “Their main focus is more on accuracy of claim payments and administrative ease, rather than to monitor, manage or control the volume of utilization and physician-based cost of these big-ticket health issues,” Jamilkowski explains. “Most TPAs are not incentivized to audit the clinical performance of the plans they manage or drive improved clinical outcomes. Where there is pressure,” he adds, “it generally comes as a result of administrative service providers like national health plans pushing in.”

Jamilkowski explains that most HR Directors are given a budget line for healthcare and are incentivized according to their success in managing to that budget. “So their priority is to meet budget in the face of rising cost trends – and that is generally done through re-designing the health care plans or shifting cost from employer to employee, for example by increasing deductibles and copays, offering Exchange-type benefit options, or moving to defined contribution employer funding strategies.”

It’s a numbers game, and although identifying inherent waste and inefficiency should play well into the hands of these leaders, for now it appears that it has not yet impacted their healthcare governance strategy.

“As long as their incentives don’t stretch to reducing the incidence of diabetes or hypertension across the workforce, for example – which, in terms of their impact on absenteeism are key drivers of corporate productivity – there remains significant opportunity cost built into corporate healthcare,” Jamilkowski warns.

"There are certainly some progressive employers who have taken a more holistic approach to health management, but they are few and far between at this point in time," he says. Even in cases where Centers of Excellence contract directly with hospitals to provide specific health services for their employees at deep discounts, there is debate around whether the driver is Quality of Care or Discounted Service.

"Most of what I have seen tends to gravitate towards a ‘Center of Cost Convenience’ approach, as opposed to ‘Clinical Excellence’," says Jamilkowski.

Big Picture Prevails

Many of the corporations we spoke to for this article take their benefits program very seriously and have long-standing relationships with the carriers, or brokers, that manage their self-insured plans. But while they acknowledge concerns regarding individual healthcare costs, some also point out that HIPPA regulations around Protected Health Information preclude corporations from accessing individual’s health records (individually identifiable health information) to protect employees’ privacy. On the other hand, there are plenty of consulting companies that perform claim audit services on this kind of data and provide analytics that help identify the biggest drivers of claims costs – for example around specific diseases, geographies, or population demographics – which, in turn, allows companies to implement more effective treatment plans.

But while these practitioners don’t deny the possibility of billing errors being overlooked, many believe the potential for error within corporate practice is much lower than that quoted by government Medicare or Medicaid programs.

"We naturally track metrics on healthcare, but we are looking at the big picture. So, if the trend overall is 6% and our plan suddenly shows higher increases, that would raise a flag," says a Benefits Director of a large multinational. “Corporations like ours have lots of checks and balances in place that should preempt errors or fraud, and we certainly chart TPA metrics around customer service and claims data reporting. There is no dearth of data.”

Although this practitioner and others like him acknowledge opportunities around governance of cost data, they are more focused on identifying ‘big picture wins.’ Where they can really create an impact, they say, is in educating staff to become better consumers of health care, by not visiting the ER, for example, but by seeing a doctor earlier, or maintaining their health. As a result, many are focused on managing these trends right now, faced with significant health challenges across the population and the cost this imposes in lost productivity as well as in actual dollars. Certainly, they concede, there may be low hanging fruit available via more careful governance practices, but most are putting their faith in the TPAs to manage this.

Practice Good Procurement First

Despite this confidence – or maybe because of it – Jim Arnold maintains that the monies corporate America is leaving on the table are substantial enough to warrant a different tack.

"When I launched APEX Analytix 20 years ago to carry out audits on the supply chain, I tended to get the same response from large organizations: ‘We are already checking on this and are confident in our procedures’.  Now fast forward twenty years later, ‘recovery audit’ is a multibillion dollar industry with global players like APEX, PRG, Cotiviti, Broniec and Lavante, as well as hundreds of smaller regional players.  Additionally, this ‘recovery audit’ business was built around a fraction of 1% as error rates. This is dwarfed by the 12.1% error rate in healthcare as recently confirmed by the Medicare administration through their audits of 50,000+ medical bills.” He also adds that healthcare bills hold additional complexity relative to rapidly escalating costs, limited price transparency, spousal & dependent eligibility, complex billing protocols, potential for fraud and growing concern among employees, who are shouldering an increasing share of that burden.

In addition, he warns, one of the darker secrets in healthcare is the fact that a third party administrator may pay ‘above market’ prices for your healthcare bills with your checkbook, all without your knowledge or specific approval. 

“So, yes,” says Arnold, “healthcare does need the big policy shifts, but first and foremost, it should be about good procurement practice. I think it's an opportunity, once recognized, that will explode."

Reorganization Provides a Chance to Rethink

While transforming healthcare management is sensitive, even ‘risky’, sometimes a crisis presents an opportunity. At one company SSON spoke to (which cannot be named because it is going through a restructuring right now) the HR Shared Services is recognizing the opportunity, and believes that healthcare management might be the kind of innovative shared services solution that many of its devolved business owners would welcome.

In this particular case, the HR lead had recognized the need to reevaluate the cost of healthcare a few years back. Part of the problem, as he readily admits, is that with so many burning platforms across the business, “it’s easy to push this discussion out into the future.

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“Nevertheless”, he agrees, “there is a need for much greater scrutiny across healthcare costs and there are certainly plenty of options for us to do things differently. As we are going through a change in our enterprise, we are thinking more and more about the future model of shared services. Adding this capability [healthcare cost governance] to our repertoire would make sense as we redefine the purpose and value we can contribute to our business unit customers going forward.”

To drive change, however, and shine a brighter light onto these healthcare costs is going to require a multipronged approach. Rather than operate in a silo, he warns, “we need to include people from procurement and finance in this discussion, as well at the Center of Excellence group currently managing benefits.”

Human Productivity is Key Outcome

No matter what or who is driving the change, the real impact of far-reaching healthcare transformation will be felt in terms of employee productivity, says KPMG’s Jamilkowski. And while there is plenty of investment in technology, training, and process, why is it that most organizations are still overlooking the ‘condition’ of their primary drivers of productivity?

Most companies are unaware, for example, that 65 to 70 percent of Americans [read: their workforce] do not visit a doctor or hospital in a given year, he says. This leaves 30 percent of the population/workforce running up the costs and limiting workplace productivity levels. But while supporting the health of this 30 percent is crucial, keeping and incenting the other 70 percent to continue being healthy and support their lifestyle will reap far greater rewards in the long-term. “Many companies are overlooking the fact that healthy, happy employees make businesses thrive, and the manner these employees are approached is critical for recruitment and retention, especially among Millenials” Jamilkowski explains.

Where there is an effort to counteract the now-standard cost increase trend, it generally takes the form of a vendor management approach focused either on meeting budget or cutting cost. Too often, this translates into increased deductions or co-pays that shift more of the burden on to employees, redefined and more restricted benefits plans, even higher deductibles, or defined contributions via private exchanges – a one sided strategy that ignores ‘health’ nearly entirely, and instead manipulates various levers to contain cost.

Culture First, Processing Expertise Second

The more progressive companies have already woken up to the fact that illness or readmission are productivity killers. And that is certainly where a Shared Services methodology or approach could provide real value and benefit by leveraging processing excellence, data analytics, and transparency. Changing the culture at the employer level, Jamilkowski warns, is difficult. “Most corporations don’t want to take on the burden of managing clinical care themselves. Benchmarking the cost of care is one thing, proactively driving a better holistic outcome quite another, and it requires a whole different skillset and investment in leadership.”

For progressive leaders, however, returns promise to be significant. "Everyone wants a healthy employee base," says Jamilkowski. "The cost of illness, hospital visits, emergency room visits, readmission, etc. is costing corporate America far more than its nominal dollar value. Companies that are proactively transforming the health care they provide to their employees know that they are driving exponential productivity gain."

Why So Little Action?

Despite the many headlines, the sheer size of its cost, the year-on-year growth trend … Why is healthcare cost governance not taking center stage on the corporate ‘fix it’ agenda?

The answer may be simpler than we think.

Over the last decade, most CFOs have been focused on navigating the treacherous waters of global economic uncertainty and challenge. Their attention has been firmly on revenue growth, reassuring Wall Street, and facilitating debt structures – not on expense management. Where there has been a mandate to ‘contain’ healthcare, this too often translates into redefining benefit plans, changing assumptions, increasing deductibles and co-pays, and otherwise pushing various buttons that manipulate the numbers. And certainly, that is a necessary part of the solution.

But while new technology and analytics solutions like finHealth’s can shine a light on the underlying problem, and thereby support corporate enterprise goals of higher productivity and overall employee satisfaction, real transformation will require a more holistic approach. Today, with the economic landscape looking slightly more hopeful and ‘finance transformation’ driving many corporate agendas, it might just be the time to incorporate healthcare spend into the wave of reform.

Companies like Walmart, with its Center of Service Excellence, have taken the lead. And whether through adopting a shared services approach, or simply by redefining their own scope, benefits leaders will not be able to avoid this issue for much longer.

A New Frontier of Cost Governance

Healthcare cost governance represents a new frontier – and it may be that shared services takes a lead in guiding it. Indeed, with many shared services leads looking to the future actively broadening their scope, leveraging data, promising business insights and delivering greater intelligence … healthcare cost governance is a natural fit. For ambitious shared services leaders, this might be an opportunity to leverage the process excellence, standardization, and analytics capability that they have built up, and collaborate with benefits administrators to drive smarter healthcare sourcing.

For true healthcare transformation to take hold will require far-reaching engagement across the vendor landscape and stakeholders – just the kind of integration multifunctional SSOs have been practicing for years – and an incentive system that is aligned around employee productivity outputs, not just cost.

The question is: Where do you see your role in healthcare transformation?

Note: SSON is inviting a small group of leaders to join a forum to discuss improved governance around healthcare costs. If you would like to be considered for participation, please email me.

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