Small Manufacturer Slays Healthcare Beast & Proves Harvard/Berkeley Economists Wrong

Healthcare’s ongoing hyperinflation and the upcoming Cadillac Tax have many unions and employers on edge. Their knee-jerk reaction is to either use blunt instrument high-deductible plans to control costs blind to human behavior or lobby Congress to repeal the Cadillac Tax. Neither is a good fix for the short or long-term problems plaguing healthcare. In addition, despite companies spending tremendous amounts of money on healthcare, benefit plans are so impenetrable that the largest chunk of the workforce would rather clean their toilet than understand their health benefits. A recent study analyzed by Vox’s Sarah Kliff demonstrated that high-deductible plans aren’t having the desired effect. The good news is that the vast majority employers are pouring more than enough money into health benefits and retirement plans to have outstanding healthcare and a comfortable retirement. The bad news is the status quo is getting us neither.

Fortunately for some union members and employees, there are smart unions and employers who recognize that healthcare's catastrophic amount of waste leaves plenty of room for innovative health benefits. Benefits plans that incorporate elements of the Health Rosetta help both the employer and individuals' financial bottom lines by working with providers focused on achieving the Quadruple Aim (i.e., improved health outcomes and experience). Outlined below is the more effective way to control costs. This example shows how a fairly small employer (less than 1% the size of the company examined in aforementioned study yet they achieved a far better deal) in Oklahoma deployed a solution that allows them to provide a great benefit to their employees while using the money saved to fund R&D at a level twice that of their industry peers. They believe that helps ensure their enterprise continues to succeed so that there are great career opportunities that help retain a high-quality workforce. [Disclosure: the Health Rosetta is a non-commercial open-source project that defines a model benefits plan that I have catalyzed.] With proper design, it's remarkably easy to slay the healthcare cost beast.

Kliff’s article outlines the impact of how high-deductible plans have unintended consequences.

Economists Zarek Brot-Goldberg, Amitabh Chandra, Benjamin Handel, and Jonathan Kolstad studied a firm that, in 2013, shifted tens of thousands of workers into high-deductible insurance plans. This was a perfect moment to look at how their patterns of care changed — whether they did, in fact, use the new shopping tools their employer gave them to compare prices. Turns out they didn't. The new paper shows that when faced with a higher deductible, patients did not price shop for a better deal. Instead, both healthy and sick patients simply used way less health care.

Kliff goes on to describe how the attempt to lower costs may well have had the opposite impact on costs by deferring care. In other words, a small fire not addressed can blow up into a 5-alarm fire.

Even more striking: The sickest workers were those who were most likely to reduce their use of care while still under the deductible — even though this is the group that needs lots of care and is most likely to blow through the deductible by the end of the year. Once these sick workers actually exceeded their deductible, though, use of medical services rebounded.

Because the economists only looked at blunt-instrument high deductibles, they come to a conclusion that could misinform purchasers and policy makers. Kolstad stated, "We don't find any evidence they look for a lower cost. They just don't go." The example of the manufacturer outlined below demonstrates quite clearly that if an individual has an easy way to act on price and the proper incentives, they will act very differently.

Unions Having Adult Conversations

For a generation, the annual benefits enrollment period for the vast majority of the workforce has consisted of human resources and/or a benefits consultant trying to put lipstick on a pig. That is, paint a rosy picture of how great their benefits plan is while letting them know that they’ll have to pay more to get less. Understandably, employers have grown frustrated by how they can spend so much money and still have a horrible consumer value proposition for the employee.

I asked the CEO of one of the value-based primary care organizations (Iora Health) why it was that one of their early customers was a carpenters' union and how the union achieved broad participation of their membership in a very different care model. He said it was simple — the union leaders decided they had to have what he characterized as an adult conversation with their membership. They no longer wanted to polish a turd.

The union leaders gathered their membership and rhetorically asked them if anyone wanted to ensure they never took home any more money the rest of their career than they were presently taking home. If they wanted that, the union should all stick with the health benefits approach they had been taking. That got their attention, so they went on to explain how they could move to a far superior primary care model that would require roughly doubling their investment in primary care. However, they would more than pay that back through reduced hospitalizations, ER visits and unnecessary surgeries. Top-notch primary care organizations such as CareMore, ChenMed, Iora Health, Qliance and others have consistently shared Quadruple Aim-achieving outcomes in a wide variety of settings including some of the toughest populations of patients out there — the so called Hot Spotters.

Small Manufacturer, Big Benefits

One might not think of a carpenters' union as the first place for benefits innovation, nor would you think of an Oklahoma-based manufacturer being the kind of organization providing a best-of-breed benefits package while spending far less than peer organizations — approximately $4,000 of savings per covered life. The Oklahomans I met while speaking at a Medicare gathering this past week frequently joked that they were happy that Mississippi existed so they weren’t 50th in the health rankings for obesity and related issues (Oklahoma had long been 49th in these rankings but they have moved to 46th in some rankings). Despite this, some of the most innovative things in healthcare are taking place in Oklahoma to transform healthcare.

Founded over 75 years ago by Frank W. "Pat" Murphy, Enovation Controls is a provider of products and services for engine-driven equipment management and control solutions. Justin Bray is their Vice President for Organizational Effectiveness and HR with responsibility for roughly 600 employees. With a background as a Six Sigma Master Black Belt, he had a natural tendency to eliminate wasted effort and money. With over half of healthcare spending not adding value (source: pwc), healthcare is a treasure trove of inefficiency.

Like the carpenters union, Enovation Controls recognized the undermined primary care model in the U.S. was leading to sub-optimal outcomes. Located in the heart of Walmart territory where as much as 75% of the population doesn’t have an established primary care relationship, they put in what is the most foundational element to a proper healthcare model — value-based primary care (vs. the milk-in-the-back-of-the-store primary care that is used to drive volume). They credit this approach with literally saving lives of their employees (PDF).

If the 75,000 company featured in Kliff’s article is like virtually every other company I’ve observed using high deductible plans and so-called “transparency” solutions, they didn’t design their health plan in a way that would drive real employee engagement. I consistently hear that “transparency” offerings get as low as 2% utilization. I would posit that the reason is that they overlay their “transparency solution” on top of a fundamentally flawed and disaggregated fee-for-service model that still has the nightmare of co-pays, deductibles, Explanation of Benefits (the biggest oxymoron in healthcare) and bills that come from a wide array of providers for the various piece parts of healthcare. For an analogy, imagine if you were wanted to know the real price of a car you were buying. Instead of getting a price on the car, they gave you the price of the bumper, transmission, tires, etc. Even when transparency solutions attempt to capture the full picture, they don't eliminate the nightmare of co-pays, deductibles, co-insurance, EOBs, etc.

In contrast, Enovation Controls worked with a Transparent Medical Market (TMM) that resulted in a 70% participation rate of eligible cases. Not unlike the carpenters union, Bray attributes the high participation rate to two primary factors:

1. Communications: During the rollout of the TMM, they shared their costs with employees and how it impacts all of them and how they had found a better way. They shared specific scenarios and what the costs to the company and the employee would be. For most people, they were shocked by the vast price disparity and how it was common for the lower priced providers to be the highest quality (like most things, doctors improve with repetition so they can operate efficiently with fewer errors).
2. Ease of Use: The employees have access to an app or a phone number to find where they can go and have zero out-of-pocket costs. Instead of dealing with a mountain of bills and paperwork, following the procedure they receive a thank you survey to ensure the experience went well. As Bray said, it's one of the few times in healthcare that the "Easy Button" can be pressed. This is particularly critical for the healthcare purchaser as these are some of the highest cost items they have to cover.

Because of the focus on higher cost items, they have achieved well over 90% of the potential savings (even with 70% participation). The calculation of the potential savings compares the historic “allowable” amount from Enovation Controls' claims history. That is compared against a true market price made available via the TMM. A TMM provides the true market price as what a provider would accept if you showed up with a bag of cash for a bundled procedure such as a total knee replacement or spinal fusion. The savings over historical allowable amount from a traditional PPO network ranged from 21.92% to 81.28% with an average of 59.23%. An example line item is a “Spinal fusion except cervical w/o MCC” where they paid $38,000.00 versus the historic allowed amount of $129,138.41 resulting in a $91,138.41 savings for the employer on one procedure alone.

Bray described the experience of the spouse of an employee coming up to him at a high school football game and thanking him. Bray asked why he was being thanked. The individual shared that he had gone through a procedure and they didn’t have to pay a dime out of pocket, nor deal with any bills, EOBs, and the rest of the nightmarish experience after an expensive procedure. The employee earned a $30,000 salary and the couple would have hit their maximum allowable out-of-pocket ($2,500). The fact that they saved that money meant they avoided a self-described financial disaster and they’d be able to have a Christmas that year. This kind of response from an employee is a radical departure from what Benefits professionals typically face as they push more burden on an employee's shoulders.

Like every other purchaser, Enovation Controls knows that tackling high cost procedures is central to slaying the healthcare cost beast. Their program even extends to items such as complex cardiac and neurosurgical procedures where they have access to the same Centers of Excellence facilities such as Cleveland Clinic that large employers have pioneered. Whether they are a local surgery center or Cleveland Clinic, high quality providers are happy to provide the deep discount as it provides incremental business without the hassle of pre-authorizations and utilization reviews. Why? They have demonstrated consistent high quality and a track record of not doing unnecessary procedures so they can remove that burden. Further, they save tremendously by not having to deal with the Rube Goldbergian claims processing systems that plague healthcare, as well as not having to chase down patient receivables which is a massive issue for most providers. Once the procedure is complete, the provider gets paid within five days for the full bundled price that is frequently "warrantied" (i.e., post-surgical complications within 60-90 days are addressed at no charge). That is in stark contrast to how many providers have profited from complications and medical errors as they have charged for those items even though these are avoidable events.

Using data from Mercer, Enovation Controls estimates that they save $2 million every year compared to peer manufacturing organizations. For a relatively small company, that is a meaningful amount of money. In addition to a nice benefits package, they re-allocate what would have been wasted on healthcare spending to R&D. While companies in their sector spend 4% of annual revenues on R&D, they spend 9% on R&D which helps them stay ahead of their competition as well as attract and retain the best engineers.

No Excuses

Bray indicated that the partnership with their vendors and their employees is the key to their success and it has been extremely simple. When a small manufacturer or union can pull this off, it begs the question why every employer or union isn't taking the same steps. Since a new primary care model or TMM can be implemented at any point in a benefits cycle, they don’t need to wait. With medical expenses being the number one driver of bankruptcy (even for those with health insurance) and being responsible for devastating retirement nest eggs, slaying the healthcare cost beast is an urgent issue. The fact of the matter is employers pour more than enough money to fully fund an outstanding health benefits program and a great retirement. However, the status quo is producing neither at great expense to businesses, households, and the general economy. Smart employers such as Rosen Hotels (who achieved even greater savings) and Enovation Controls demonstrate it's possible even in one of the most obese states and one of the most expensive (for healthcare) states. In other words, there is no excuse for employers and unions not to take action now.

It's easy to get excited about new technologies and science -- wearables, sensors, big data, microbiome, genomics, personalized medicine, etc. all hold great potential. However, having implemented many enterprise systems, it's well understood that one must fix an underlying process before applying new technology or else you just get a faster, more expensive process. Sadly, much of the so-called medical innovation that is out there falls into that bucket and has had devastating financial consequences for families and companies. It's clear to me that the potential of exciting new technologies and science will only be realized if it is layered on top of a good foundation. Companies such as Enovation Controls, Rosen Hotels, and others are showing the way.

This article was also published on Forbes.