How to Reduce Healthcare Costs

For over a decade, rising healthcare costs have been and continue to be a significant challenge for organizations, particularly in the United States where healthcare delivery is privatized.  This blog is intended to identify the problems and challenges associated with healthcare from a cost perspective as well as offer insights into potential analytics and strategies that may assist in the mitigation of rising healthcare costs.  The content in this paper is designed to appeal to a wide audience ranging from a benefits specialist interested in revamping their company’s healthcare plan design to labor relations executives strategizing for upcoming union negotiations.

The Problem

Rising healthcare costs are extremely difficult to manage as employers have very little control over both the utilization of healthcare benefits and the price of healthcare benefits.  Medical inflation affects costs per employee largely as a result of the introduction of new, more expensive technologies and procedures along with specialty drugs.  In addition, in general, there is either a lack of employee understanding or appreciation with respect to company-paid healthcare benefits and their associated costs. 

The Challenge

Healthcare coverage is typically seen as a “sacred cow” by employees.  Accordingly, reactions by employees and/or unions to any proposed modifications to healthcare plan designs or employee cost share are typically emotionally-charged.  Based upon my observations over the years, unions and employees generally expect the following from their employers:

  • No reduction in the employee’s standard of living via increases in employee healthcare cost share
  • Maintain and/or improve healthcare coverage
  • Maintain and/or improve the quality of healthcare services
  • Maintain employee choice – employees want a choice when it comes to where they obtain their healthcare 

Accordingly, this presents a significant challenge for organizations who are trying to reduce and/or mitigate rising healthcare costs while managing these employee expectations.  The good news is that there are numerous opportunities to do so!

The Understanding

In order to address rising healthcare costs, organizations must have a deep understanding of the multiple plan design considerations, levers and tools that are at their disposal including the following;

  • Plan coverage specifications (e.g., eligibility rules, limits, etc.)
  • Employee cost share (e.g., copayment versus coinsurance)
  • Delivery Models (e.g., broad versus narrow networks)
  • Clinical Programs (e.g., drug formularies)
  • Cost mitigation tools (e.g., transparency tools)

The Strategy

As mentioned earlier, since healthcare benefits are an emotional topic with employees and unions, organizations must be careful in how they tackle the issue.  

The first step is to simply communicate the cost of healthcare benefits to employees.  In many cases, the good old “80/20” rule applies where 20% of the employees drive 80% of overall healthcare expenditures for the organization.  If this is true, 80% of your population will not believe you when you say that healthcare costs need to be addressed, because they are all thinking “it is not me”. Perhaps it may make sense to provide employees with an annual summary that highlights their healthcare spend versus the average employee in the organization.  It should be noted here, that in all cases, employers must always respect any relevant privacy laws.

Secondly, any proposed modifications will have a better chance of success if the organization respects the basic guiding principles of employees and unions similar to those noted above.  Accordingly, where possible, management proposals should attempt to;

  • Maintain quality of care
  • Maintain employee choice
  • Minimize employee intrusiveness (e.g., increased cost share)

One of the most basic opportunities to solve this dilemma is to design a healthcare plan that encourages “employee consumerism”.   This approach has the potential of being a win/win solution for employers and employees. The organization can reduce healthcare costs while in most cases respecting the desires of employees and unions (i.e., quality of care, choice, minimal intrusiveness).  Also, in many cases, these healthcare modifications and associated cost savings can be leveraged as a quid pro quo for union demands such as incremental wage economics during union contract negotiations.

I have created a strategic model (REDUCE Model) that identifies numerous plan design options, strategic levers and tools that can be utilized to develop a comprehensive strategy to mitigate rising healthcare costs.  Employee consumerism initiatives are certainly one of the fundamental aspects of this strategic model.

The Solution

In order to apply the REDUCE Model effectively, it is important to analyze and drill-down on your healthcare cost data in order to identify appropriate areas of focus.  This methodology will allow the organization to develop a comprehensive solution that can easily address its specific needs. Accordingly, I have developed a 3-Step Analytical Approach with detailed examples along with illustrative solutions that can be utilized for this task.

If you are interested in learning more about how to mitigate rising healthcare costs, the REDUCE Model and the 3-Step Analytical Approach, visit our website at www.hrandlaborguru.com or contact me directly at clightbody@hrandlaborguru.com.  For a deep-dive module on reducing healthcare costs that incorporates the elements outlined above, check out the “Healthcare Analytics” webinar in the HR Analytics series.  For a more general webinar on cost reduction strategies for healthcare, pensions and other employee benefits, check out Part 2 of our Reduce Your Labor Costs series.