Managing the costs of spiralling employee benefits
MANAGING THE COSTS OF SPIRALLING EMPLOYEE BENEFITS: The affordable healthcare Act, [ACA] has landed on us, with a 2,400 page thud! At Gnostam Consultants, we believe that it is useful to remind ourselves of the reason why this huge legislative effort was undertaken. In theory the whole effort has been as a response to the need to reduce healthcare cost inflation in the United States. At Gnostam Consulting [http://www.gnostamconsulting.com] we have developed a method which assists the industry in managing data on healthcare costs. We have “mapped” the industry structure and data flows, and believe that those industry participants who engage with us in this process will derive huge economic benefits from being able to discern where, in the industry “value chain” to make investments that will translate in lasting competitive advantage. The US has experienced more than 6.93% annualized healthcare inflation1 over a 30-‐year period. The profits of the S&P, by comparison have risen by 5.9% over that same period. The 1.03% gap compounds dramatically to change the competitive position of American employers, [$1 at 1.03% for 30 years grows to $2.427], threatening sustainability. Another fact is that we live longer. But perhaps the most significant reasons for the increase in healthcare costs in the US is that we have very “inefficient” price discovery mechanisms for healthcare procedures. Change in S&P 500 earnings vs change in US Healthcare cost Index PPP, [source OECD S&P]. 0.6 0.5 0.4 0.3 0.2 0.1 0 -‐0.1 Year 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 -‐0.2 -‐0.3 -‐0.4 US Earnings Chg in S&P 500 OECD Index of US US per capita Healthcare 1 Healthcare costs expressed as an index in PPP terms
The most innovative insurer in the industry, United Healthcare has made huge investments in the capture of data for different types of procedures. In fact the whole philosophy behind ACA is to bring more price discovery to employers. What we will discuss in this paper is the ways in which investments in “healthcare price” discovery will generate outsize profits for those industry actors who invest to “change” the current business model. The data shows that the rate of change of healthcare inflation is decreasing. The fastest decline as can be seen in the chart above, has been in the Medicare index, which as we can see is now approaching 1% yearly change. The commercial index is the one which has remained stubbornly above 5%. The “commercial index” developed with Milliman and S&P is an average of commercial hospital insurance and commercial professional services insurance. The methodology of how this information is gathered is important because as we will show, the best way in which to reduce overall costs in the industry is through improved access to price discovery. As with all price information exchanges, there will be an inevitable move towards a centralized inventory and price database, which will allow for better price discovery.
The current way that the index data is collected is as follows: Clearly if we can discern a more efficient way for the industry to be organized, those who will change and be able to restructure their costs, so as to engage in a more compelling way with the buyers “value chain”, then the “economic value” added will accrue most to the first movers, as we have seen time and again from Amazon.com to Google. As we know, we are overwhelmed with data and information. The key strategic advantage is therefore the organizing of data in a way that can provide empirical insights into how best to “disrupt” existing business model for greatest change.
CURRENT HEATHCARE INDUSTRY STRUCTURE: The current system has insurers at the center of the system. It is the insurer who contractson a group basis with the employer, on the basis of actuarial risks of the employersinsured population. The insurance industry claims that it has grown premiums inresponse to its own regular underwriting cycle, and the major increases from 2000 were,the insurers claim, a s result of managed care to catch up from the mid 1990’s.However, more recently we have witnessed extensive consolidation and concentration ofmarket power in insurance industry majors, with increased profit margins and a hugeoutperformance of insurers relative to the S&P 500 index. This cycle peaked in 2006.Another important aspect of the US Healthcare industry is the percentage of NationalHealthcare Expenditures spent on administration as a percentage of GDP. The US stillhas the highest ratio at 7.3% in 2003 vs. the next highest, Germany at 5.3%. Mostanalysts think that the streamlining of the many diverse administration systems may savebetween $32 to $46 billion per annum. These are not insignificant figures.At Gnostam Consulting, [http://www.gnostamconsulting.com] we are devising ways inwhich we can assist the large-scale hospitals who are the biggest $ consumers of the UShealthcare budget on ways to achieve savings and efficiency. This is important becausethe first mover will go well beyond a “one-time-savings” improvement, and in our viewhelp develop a long term investment which will yield very significant net gains ineconomic value.