The Health Care Costs Quandary: What Can Be Done About It?

yuI recently attended a roundtable discussion that included Human Resource (HR) executives, chief financial officers (CFOs), benefits brokers, consultants and providers who discussed ways self-insured employer plans can lower their health care costs. The meeting was hosted by a state-of-the-art hospital that is part of a small chain of medical facilities, including emergency rooms, imagine, clinics, orthopedic hospitals.

Some of the consultants in attendance specialized in reference pricing, where enrollees pay all costs above a maximum allowable cost price. Other consultants specialized in direct contracting with providers. There was also a firm that negotiated cost-plus contracting and one who facilitated medical travel.

The meeting turned to a discussion of how to convince CFOs to take notice of the savings they could retain in health care spending by working more closely with providers. There are numerous providers willing to contract directly with employers and offer them lower prices, bundled discounts and guarantees on outcomes.

There are numerous obstacles. Firms that do not self-insure are subject to their carriers’ network and negotiated discounts. Firms that self-insure but have large insurers act as third-party administrators (TPAs) to adjudicate claims may find that the carriers do not want to adjudicate prices that are different than their own. Some large insurers have most favored nation pricing, where providers cannot offer a price lower than they receive. One consultant claimed some large TPAs may charge employers higher prices than they reimburse providers. Another obstacle is that large insurers who act as TPAs are not fond of releasing claims data (to verify the contracted rate was received) even though the data is technically the property of the employer’s plan. Finally, the CFO is very busy and likely does not view HR minutia as an area of interest.

HR directors do not want to take risks.  Changing the plan design and doing something different may later land the HR director in trouble. A mid-market HR director has, say, 500 employees and an equal number of dependents who can potentially complain about any new plan design that requires enrollees to comparison shop for better prices. Moreover, the HR director has to worry about senior executives and the executives family members, who may be displeased with any perceived change in benefits that requires effort.

This was all a rather sad – but familiar – story. Most people with health coverage have it through their job. Most of those who do not have job-related coverage get it through Medicare or Medicaid. About 89 percent of medical bills are paid by third-parties. The convoluted way we pay for health care is so distorted that conventional incentives do not apply.

Now for the conspiracy theory. Lack of transparency is everywhere. Most of the health care stakeholders do not stand to benefit from transparency and cost-conscious patients. I spoke with a consultant who had a personal story about a family member who had recently undergone surgery. Rather than a low-cost ultrasound, the patient was wheeled in for a CT scan or MRI without a discussion of price or need. The more advanced diagnostic procedure was around $4,000 – even though MRIs/CT scans can be obtained for $400 elsewhere by paying cash. By the way, paying cash for an MRI when the insurers’ negotiated allowable price is, say, $3,000 results in the entire $400 not being counted towards the health plan deductible.

Someone posed the question: why do large insurers not take a harder line on hospital prices? One consultant claimed it’s because the status quo makes them so much money they don’t want to rock the boat. Another consultant posited it’s because the health insurer charges employers more for claims than it reimburses hospitals for the service. His theory was: the higher the price; the bigger the opportunity to profit off the spread.

One consult relayed how he had reviewed claims data and found self-insured employers are paying up to 250 percent of what Medicare pays for the same service. By direct contracting he has helped his clients get rates of 150 percent of Medicare’s price. Yet, it’s like pulling teeth to get TPAs to work with providers directly. Nowadays hospital list prices are double to triple what insurers ultimately pay for the service. Of course, list price are not real; they are a fiction to make it sound like insurers and employers are getting a bargain. The actual market price is more or less what health plans reimburse. But pity the poor soul who gets stuck paying the fictitious list price.

Consumers are also the problem. For that matter, research has found workers do not comparison shop. When a decision support tool is available, research has found from two-thirds to three-fourths of workers either do not log in ever; log in only once or only twice. Other research has found when workers do use transparency tools, they use them to make decisions about whether they can afford the medical service — not to find better prices. Consumer use the price as a take it or leave it proposition.

By the end of the evening it became clear there is plenty that can be done to lower the cost of medical care and get providers to compete on the basis of price, quality and other amenities. The problem is: nobody wants to. Workers think their employee health plan is a free perk that precludes them from having to shop. Employers are too busy pursuing their own business interests to upset the status quo. Doctors, hospitals and insurers make too much money off the current system to allow any disruption or creative destruction to threaten the gravy train. Increasingly, the gravy train is employers, who pay huge premiums for employer plans and then pass the cost on to workers in the form of lower take-home pay. Workers naïvely believe their employee contributions are their total cost and the employer contributions are free gifts. They aren’t; health benefits reduces take-home pay and future pay raises.

The problem remains: what can be done to encourage stakeholders to actual rein-in health care spending? It is not impossible. The hardest part is convincing those who need to be part of the process they should become involved.

Comments (14)

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  1. Lee Benham says:


    The problem is: nobody wants to. Workers think their employee health plan is a free perk that precludes them from having to shop.

    It seems to me the that this is the catalyst of the rest of the problems.

    Employees think health care is a perk not realizing its part of their compinsation and are allowing 3rd parties to control All the money.

    • Devon Herrick says:

      Lee I agree. I believe that if middle-class workers actually realized they are dumping $15,000 of their pre-tax annual income down a rat hole, they would demand a change. For instance, most would be willing to get procedures performed from a list of preferred clinics and facilities. Most would likely to agree to this because they do not expect to need a medical procedures next year.

  2. Barry Carol says:

    I can offer a simple idea that won’t get the HR director in trouble or make any claim on the busy CFO’s time. Provide each employee with an annual statement showing his total compensation – wages or salary, bonus, employer share of FICA taxes, employer contribution toward the 401-K plan or approximate increase in value of the defined benefit pension vested interest, THE EMPLOYER’S CONTRIBUTION TOWARD HEALTH INSURANCE COSTS, and any other benefits for which the employer paid cash or, in the case of vacation or sick time, the cost of hiring additional workers to fill in for the employee’s absence.

    Follow the statement up with information telling employees that if the employer’s healthcare costs went down, the freed up money would be shifted to higher wages or other benefits that employees might value more highly. Maybe hold meetings in each work location to go over this and answer employees’ questions. A little accurate information and a little effort at communication with and education of employees on this topic could go a long way toward mitigating employer healthcare and health insurance costs.

    • Devon Herrick says:

      Good idea. Another methods the CEO of ACHRM mentioned was to ask the CEO of a company “Who is the highest-paid employee here in this company?”

      The CEO’s natural response, “Why, I believe I am!

      Consultant: “No, you’re not. With medical bills there are numerous others who cost the company more than you on an annual basis.”

      When CEOs realize there may be people on the company payroll costing millions they take an interest in managing benefits in a more efficient way.

    • Jimbino says:

      Another good idea would be for the employer to provide each employee a detailed breakdown of how much of his wage effectively is paid out to spouses and children of the married and the breeders, so that the singles and the childfree would learn how much of their income goes to support of familes other than their own.

  3. Ron Greiner says:

    Now that we are repealing Obamacare and changing the system we need to:

    1. Fix COBRA extensions to last 10 years instead of 18 months.

    2. Employees should sign a statement on the COBRA cost.

    3. Employees should have the option to have all of their health benefit funds deposited into their HSA.

    • Devon Herrick says:

      Ron, I like item No. 2 and 3. I’m a little hesitant to extend COBRA for 10 years, however.

      I’m afraid employers would be exposed to risks beyond what they could easily reinsure for. Years ago I was in meetings with the Texas BlueCross people pitching the idea of personal & portable insurance, where workers could take their coverage with them. This is what you’re basically talking about. The Texas Blues explained that the only people who would want that option are the ones who could not get coverage anywhere else and it would cost them a fortune.

      As a thought experiment, maybe extend COBRA out 5 years and allow the premiums to rise each year some significant percentage to discourage remaining too long.

      • Barry Carol says:

        Devon — Only about 2% of those eligible for COBRA take it now mainly because they can’t afford to pay the premium especially if they lost their job due to getting laid off and now have no income beyond, maybe unemployment benefits. Extending COBRA forever wouldn’t change that.

  4. Allan says:

    “what can be done to encourage stakeholders to actual rein-in health care spending?”

    Reduce the stakeholders to one major party, the individual. Provide the same tax benefits to the individual as to the employer. Everyone is afraid to act so they let the costs rise and pass it off down the line where no one is the ultimate payer until they reach the individual.

  5. Larry Gagnon says:

    In order to ensure that the price of a product or service becomes much greater than the value of such product or service, it is only necessary to convince the purchaser that he is not responsible for payment of the price. This disconnect is evident in medical services and has led to the current absurd paradigm. Doctors routinely schedule unnecessary tests because the costs are not borne by the doctors and the CYA urge is maximized in our litigious society. Patients have no real motivation to question the benefit of a test or the cost. I have seen it all first-hand. Even Alice in Wonderland would be shocked. What is more useless and counter-productive than knee-jerk CAT scans? DOG scans?

  6. William G. (Bill) Stuart says:

    Amazing. There’s so much that an employer can do to rein in costs. As noted in the article, employers are too busy focused on their business. Their focus will remain there until they realize that medical insurance is one of their largest business costs. I love the concept of reference-based pricing because providers respond with lower prices(see the CALPERS example)and employees respond to save money. This plan requires a little higher admin cost, but claims savings dwarf the additional admin. You tell me that my MRI will cost me an additional $800 at my chosen site or that my “free” colonoscopy will cost me $1,200 because of the higher fees that my chosen site charges and I’ll travel the extra distance (usually not far) to save myself these costs.

    • Devon Herrick says:

      Bill I have never understood why insurers will gladly allow me to schedule a $1600 MRI when one exists for $400 down the street. Why doesn’t cost-sharing encourage me to seek cheaper care? Ultimately it’s the ability to say “no” and decline a high priced service that actually motivates providers to lower prices. I once ask an insurance executive and he said “member preferences”. I asked the same question to other individuals who know the industry and they said the insurers make much money off the spread between what insurers pay hospitals versus what they charge employers.

  7. Bob Hertz says:

    Devon, I am puzzled by the last sentence in your last post.

    I have no experience with large self funded plans, maybe that is where the spread occurs.

    In the small plans with which I am familiar, the insurer charges a premium that changes once a year, and the insurer pays all claims. There is no spread.

    • Devon Herrick says:

      Bob I’ve heard that argument from many brokers and transparency firms, but I also tend to share your skepticism. I always wondered if it was partly true or bogus. In a competitive market, TPAs would have to compete and contractual agreements could require transparency of rebates / spreads, which would ultimately replace admin. fees or flow back to the employers. This is the way it works for drug plans. About 85% of rebates offset fees or credit to the plan sponsor. (As an aside, drugmakers are now trying to pass the blame for high drug prices on to drug plans managers saying they pocket the fees).
      The problem is that self-insured plans report it is very difficult to get the claims data to verify what is being paid vs. what they are being charged. The meeting I attended was stakeholders who wanted to “cut out the middleman” because they thought they could negotiate better deals contracting directly. One consultant said he was seeing claims data where employers were often paying 250% of Medicare’s rates while his firm was often able to negotiate 150%.