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Large employers and the drive for healthcare transformation

February 6th, 2014

by Jonathan H. Burroughs

Of all of the major stakeholders, large employers probably have the greatest motivation to drive healthcare transformation. The federal government may have the greatest financial incentive in pure dollar amount, with a federal deficit of $15.2 trillion and a real deficit of $62 trillion when taking into account statutory obligations for entitlement programs (e.g., Medicare and Social Security).

Nonetheless, healthcare costs represent the largest and fastest growing expense item for large employers. They directly impact profitability, cost of capital and balance of trade, as well as our country's ability to meet its financial obligations to investors, employees and the U.S. Treasury.

A Towers Watson/National Business Group on Health (NBGH) 2013 Survey found the average annual healthcare cost per employee rose 5.1 percent last year to $12,136, which was significantly higher than the rate of inflation and most economic indicators. Ford Motor Company spends more on healthcare than on steel for all of its automobiles. And many businesses feel healthcare costs have a greater impact on profitability than organic growth and market share combined.


As a result, large employers are implementing the following measures throughout the country:

1. Create greater cost sharing between employees and employer through higher deductibles and coinsurance healthcare plans/policies.

Employees will make better healthcare decisions when it is in their self-interest to do so, and thus by creating a greater financial stake, individuals are more likely to do the right thing. As a result, 79 percent of employers offer at least one high deductible health plan and 72 percent offer consumer-directed health plans (CDHPs) with higher deductibles/coinsurance and flat copayments. To help these individuals make wise healthcare choices, employers provide mobile applications sponsored by third-party payers to make quality, cost and safety data readily accessible.

2. Create and contract through centers of excellence bundled payment programs based upon high-quality/low-cost contracts with healthcare systems.

Two years ago, Wal-Mart, the second largest employer in the United States with $466.1 billion in revenues and 2.2 million employees (associates), created its centers of excellence program with: Cleveland Clinic, Geisinger Medical Clinic (Danville, Pa.), Mayo Clinic (Rochester, Minn.; Jacksonville, Fla.; and Scottsdale, Ariz.), Mercy Hospital Springfield (Mo.), Scott and White Memorial Hospital (Temple, Texas), and Virginia Mason Medical Center (Seattle).

If any of its covered associates require heart, spine or transplant surgery, Wal-Mart will pay all costs if the associate goes to one of these high-quality/low-cost centers, including the costs of a spouse or significant other to accompany the individual. If the associate goes elsewhere, all of the applicable deductibles, copayments and coinsurances apply. The program has been so successful that many large employers (e.g., General Motors, Microsoft, Apple, etc.) followed suit, and this trend will probably accelerate.

3. Create and contract through narrow/tiered networks of high-quality/low-cost providers.

Large employers create networks of high-quality/low-cost providers to preferentially contract with and refer to organizations and individuals, predicated upon predetermined quality/cost metrics. The American Medical Association (AMA) and American Hospital Association (AHA) have cried foul as this results in the exclusion of both healthcare practitioners and facilities. However, large employers feel their loyalty is to their employees and investors, not to the healthcare industry at large, and will continue and probably increase the use of this practice.

4. Provide disease management programs for high cost/high risk populations to lower the cost of care.

A small number of healthcare issues (e.g., smoking, alcoholism, lack of exercise, obesity, depression, etc.) make up a disproportionate share of healthcare costs. According to the Center for Medicare & Medicaid Services, 5 percent of Medicare beneficiaries make up 49 percent of Medicare's total costs. Thus, employers recognize they must provide special attention and management to the small number of employees that have the greatest impact on costs.

According to the Towers Watson/NGBH 2013 Survey, 89 percent of employers will offer smoking cessation programs, 83 percent will offer biometric screenings, 77 percent will offer healthcare coaching and 55 percent will provide on-site weight management programs in 2014 to address the impact of a few healthcare conditions on employer/employee costs.

5. Create reference-based pricing for high-cost procedures/diagnoses.

Traditionally, healthcare systems and practitioners tally their costs and add a desired margin to determine its prices. Today, large employers and payers determine the maximum price they are willing to pay within which healthcare systems will have to realize a profit.

For example, the California Public Employee's Retirement System (CalPERS)--the California agency that manages pension and healthcare benefits for more than 1.6 million California employees, retirees, and families--created a cap on the payment for total hip replacements at $32,000, which is (in some cases) less than half of total traditional charges at some healthcare organizations. Thus, large employers and payers move healthcare to price-based costing rather than the traditional cost-based pricing and leave it to others to create a desired margin.

6. Utilize navigators and registries to guide employees/beneficiaries through the healthcare system.

Due to the complexity and fragmentation of our healthcare system, large employers provide navigators to guide employees and beneficiaries through the healthcare labyrinth. These navigators provide quality, safety, service and cost data that enable employees to make good healthcare decisions. Navigators also utilize patient registries to track the utilization and purchases of healthcare services by employees/beneficiaries to monitor costs and determine when to make constructive interventions to provide additional guidance and resources.

7. Create wellness programs to significantly decrease absenteeism and presenteesim.

Both absenteeism (absence from work) and presenteeism (present at work with decreased productivity due to illness) cost employers billions of dollars per year. The fastest growing cause of medical claims results from musculoskeletal disorders (e.g., low back pain), which results directly from obesity and a lack of exercise. The Affordable Care Act provides employers with the legal right to provide up to 30 percent of all healthcare benefits for prevention and wellness programs. These programs are now widely applied and demonstrate significant returns on investment (10 to 20 times).


Large employers have a significant stake in transforming healthcare to support profitability and the economic vitality of the nation. Whether Congress or healthcare entities and practitioners agree, employers will insist upon high quality at the lowest possible cost, and will preferentially favor those entities that do the same. Both the public and private healthcare sector would be wise to emulate and accelerate this approach.

Jonathan H. Burroughs, MD, MBA, FACHE, FACPE is a certified physician executive and a fellow of the American College of Physician Executives and the American College of Healthcare Executives. He also is president and CEO of The Burroughs Healthcare Consulting Network.


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