Managing Health Care Expenses

Shaking off the Apathy

It was 2017 and health care costs were becoming a real menace.  After five years averaging 10% annual increase in the cost of health care, we could no longer act like it was someone else’s job to manage.  Health care costs had grown to be our third largest expense and we were doing very little to manage it.  You know the routine.  Health insurance agents present a preliminary increase that is absolutely huge.  Then they “negotiate” a more reasonable increase, you shake your head, swallow hard, and then go back to the real business of managing a company.  After apathy came frustration.  Why should we have to dedicate resources to manage an out of control health system?  Who is minding this ship anyway?

We decided to face the challenge head-on.  Fortunately, we had a health insurance consultant who was also frustrated with the status quo.  They pitched the idea of becoming self-insured, joining a captive insurance group, climbing the learning curve, and finding a way to beat this thing.  Our initial reaction was skepticism.  There was no way that we were a big enough company to be self-insured.  Plus, we didn’t want to sideline important resources for questionable return.

A visit to a captive insurance members’ meeting and a well-written book offered a glimmer of hope.  We started to learn about this intentionally murky industry, got some insider advice, and started on our journey.  After two full years with a self-insured, actively managed health plan, we can report on the vastly different results.  The “before” picture was pathetic: five years of 10% annual increases.  The “picture” is much better: two years of 0.5% annual increases, which is well under medical inflation levels.  And the good news is that we still have more tools to pull out of the toolbox.

Disclaimer: This is an article about the business of managing health care costs.  We value our people and want them to be in good health.  Another article could focus on employee engagement.  This one is about managing costs while providing excellent care.

Understanding Health Costs

The first and most important tool is knowledge.  When you buy a health insurance plan from one of the giants, you know very little about what you are spending your money on.  Which means you have no idea how to improve the situation.  The most you are likely to get is a list of large expenses that justify why they are raising your rates.  Self-insured companies have access to data for every amount spent for every medical service.  But even they need to commit time to understand it.  The trends keep changing, so you must be committed to keep learning.

It helps to split up claims into segments for effective management.  For the sake of simplicity, I will use 5 groups.  Primary (replacing emergency) care, pharmacy, diagnostics and out-patient procedures, hospitalizations, and catastrophic events.  Each of the areas is managed differently and the relative spending amounts will help you to know where to focus your efforts.

Primary Care

In an ideal world, you will spend the most money on primary care.  We use a multi-employer health clinic organization.  They have multiple clinics spread throughout the communities where our employees live.  We pay a fixed monthly cost for every plan member to handle all primary care needs.  We incentivize participation by $0 co-pays and large premium discounts for an annual physical and blood draw.  The clinics focus on improving the health and well-being of our plan members without quickly resorting to specialists and unnecessary tests.  Generic drugs are dispensed onsite and blood draws are processed at a third-party lab for less money than hospitals charge.  These clinics handle minor emergencies during daytime hours.  The results have been terrific.  The high fixed costs of the clinics are more than offset by drastically lower emergency room costs, fewer unnecessary diagnostic tests, and the much higher per-visit costs of hospital-employed primary care doctors.


Pharmacy costs are managed by clinic-dispensed generics and participation in a drug-review program.  When non-clinic doctors prescribe expensive drugs, the program reaches out to the doctor and suggests a generic.  If the doctor is willing to change the prescription, the program reaches out to the member to ensure that they concur.  There are many other strategies for managing pharmaceutical costs.  A study of your data will illuminate which concepts will be most helpful.

Diagnostics and Out-Patient Procedures

Standalone diagnostic facilities offer services at a fraction of hospital costs.  We participate in a bundled surgery program that also negotiates imaging prices.  The price for MRI, CT, and PET scans is often half of the final hospital rate.  The same program offers common out-patient surgical procedures at a bundled rate.  If the facility manages the procedure effectively, they make money.  If they do a poor job or infect the patient, they will lose money.  The incentive to do good work is much better than the incentive to keep the patient’s insurance plan paying.  The services are bundled so that the hospital cannot nickel and dime individual portions of the bill.

Hospitalizations and Specialists

Services by specialists are much preferred over hospitalization.  As long as the referrals to specialists are managed by primary care doctors who are unaffiliated with a hospital and willing to stay engaged, specialist services can be cost-effective.  State of the art cost management would involve directly negotiated discounts with hospital networks.  We have not been able to accomplish this yet because the practice is not well developed in our region.

Catastrophic Events

Cancer, dialysis, premature births, transplants, and specialty drugs can cost a fearful amount of money.  We have learned that the best offense is a good defense.  First, spread the risk in a captive insurance group.  Second, make sure that they have a no laser policy.  Otherwise, the second and third treatment years can become an overwhelming burden on your company.  Finally, partner with advocacy programs.  There can be a lot of wasteful spending in the treatment of severe health issues.  You are not being hard-hearted when you hold health-care providers accountable for good treatment.  Avoiding the wrong treatment path can also save wear and tear on the patient.  These advocacy programs have contracts with centers of excellence who are the best in the country for treating this condition.  They review diagnosis and treatment plans to make sure that the best approach is being pursued.

Health Care Navigator

Tying it altogether is a health navigation service that will advocate for patients, answer their health questions, and refer to high-quality reasonably priced providers.  We hope to kickoff such a service in the near future.

Wellness Programs

Most wellness programs are a waste of money.  Instead, incentivize members to engage with a primary care doctor.  They will become aware of health issues, set goals, and customize their own wellness program.  Obligatory participation in a wellness program will have a disappointing impact on the overall cost of health care.

Executive Engagement

In a general sense, you need buy-in, participation, and management of health costs at top levels of the company.  You need to limit how many changes are coming at once.  You need to engage your health plan members, educate them about how health dollars are spent, and encourage better health.

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