4 Mistakes Businesses Make When Managing Health Care Expenses

 Mike Dendy

I recently met with a Fortune 100 company and posed the question, “how much are you paying for hospital services within your PPO network”? They had absolutely no idea. I was not at all surprised, as the actual cost of services is well hidden within a labyrinth constructed by big healthcare companies, their PPO organizations, and their “partner” hospitals.

4 Mistakes Businesses Make When Managing Health Care Expenses


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Mike Dendy

Mike Dendy is Chief Executive Officer of AMPS (Advanced Medical Pricing Solutions, Inc)

Employee benefit expenses are one of the largest ongoing costs for employers. Do you know where your money is going?

U.S. employers make a lot of mistakes purchasing healthcare services for their employees. The mistakes are uncharacteristic for the typically intelligent and frugal business managers who lead some of the country’s greatest organizations. While correcting mistakes will make an organization better, correcting healthcare purchasing mistakes has the added benefit of significant bottom line enhancements.

Employee benefits are typically the second or third largest ongoing expense for employers behind payroll and cost of goods sold. One would assume, such being the case, that senior management would be extremely in tune with these expenses and would have very detailed plans for maximizing the value of the expenditure. Such is rarely the case.

Mistake 1: Staying blind to true costs.

How much are you paying for healthcare services? Most senior leaders have a good idea in the aggregate but have absolutely no idea on an itemized basis. I recently met with a Fortune 100 company and posed the question, “how much are you paying for hospital services within your PPO network”? They had absolutely no idea. I was not at all surprised, as the actual cost of services is well hidden within a labyrinth constructed by big healthcare companies, their PPO organizations, and their “partner” hospitals. There is only one logical reason such expenses would be hidden from employers – transparency would result in a public relations nightmare for the members of this healthcare triad when employers discover how much they are overcharged.

When it comes to healthcare spending, employers are absolutely blind to true costs, trust companies and individuals with conflicting financial motivations that keep employers in the dark, and follow traditional human resources thinking that often over-emphasizes employee satisfaction at the expenses of higher total healthcare costs.

Mistake 2: Assuming there is nothing you can do.

Post the 2008 financial debacle, most employers became tyrannical about internal cost management. But, while well managed organizations became leaner by scouring every possible opportunity to reduce overhead, healthcare skipped by mostly untouched. I had a CEO tell me once that “healthcare is an overhead expense that we can do nothing about but pay the going rate…it’s just a cost of doing business in the U.S.”. This thinking is absolutely insane and assumes healthcare costs have alluded the entrepreneurial driven innovations that have advanced cost management in all other areas of business.

To put a dollar figure on it, this means that for every 500 employees on your healthcare plan, your organization is at a minimum likely overpaying by $1,800,000 annually. That equates to $1,800,000 that could go directly to your company’s bottom line – the financial impact is significant, for even the most profitable organizations.

Employers can and should be blaming the big health insurance organizations that have been overcharging you for many years. Large healthcare corporations all make more money when you spend more. Why in the world would an employer assume that those companies have any motivation whatsoever to help reduce costs? But, we also have to point the finger back at you and your own management. When have you asked for a detailed report on your health expenses? The sophomoric reports that insurance companies provide are intentionally deceptive and give employers no way to discern how your money was spent.

Did you know? It is highly likely that your organization is overpaying for healthcare services by 20% – 30%.

Mistake 3: Assuming big healthcare has your back. Let me amplify a very significant point here, I use the term “your” money loosely. The money being spent is a co-mingled fund shared between an employer and participating members. If your company is self-funded, ERISA law requires that employers spend that money prudently and protect the health plan’s assets. There’s no guesswork here, it is highly likely that your company is in breach of its fiduciary duty in protecting the health plan’s assets, and that day of reckoning is fast upon you.

Another reason corporate senior management should point the finger of guilt in their own direction is relative to oversight of the human resources (HR) function. Most corporate managers see HR as an expense of government compliance, an intermediary between senior management and rank and file employees, and a means for internally keeping the peace. Never mind that HR is financially responsible (or should be) for one of the company’s most significant expenses and the one that has grown out of control. The dictate from most senior management to HR is, “Just keep things quiet. No news is good news.”

Mistake 4: Underestimating your HR Department. With that as management’s directive, should you be surprised that HR’s goal is thus to do nothing that will disrupt, regardless of the cost? If the HR function hires an established health insurance concern along with a well-known brokerage, you might believe that they have dutifully met their obligations. Would it change your mind to know that, typically, both the insurance concern and the brokerage make more money the more you spend – and that, often, there is both an overt and covert sharing of funds between the two?

Human Resource management is a critical function for employers. HR needs to be at the corporate table more often, especially when expenses are being discussed. Like any other area of management, place smart people in the position and incentivize them to out-perform. How about a bonus tied to a reduction in healthcare spending as opposed to status-quo? Maybe a panel chaired by HR with dozens of key employees, asking if they are okay swapping healthcare dollars overpaid to providers for lower salary and bonus? Would the employee base work with HR on solutions that reduced healthcare contribution levels, co-pays, and deductibles? We have seen rank and file employees aggressively support a common cause of lowering healthcare costs as long as they are included in the education and discussion and share in lower costs with the company.

Your company is spending about $14,000 per employee on healthcare. Your employees are kicking in another $4,000 each. Over-priced healthcare services are a common enemy – unite & fight!

What is reasonable to expect and demand to reduce my company’s healthcare spend?

Well, try this Bill of Rights on for size:

  1. You have the right to ensure that your company’s obligations in being the Plan Sponsor, Administrator and Fiduciary of your Plans are protected in your Service Agreement.
  2. You have the right to expect complete transparency in financial dealings between your chosen representative (broker or consultant) and your carrier.
  3. You have the right to ensure those financial dealings do not compromise your fiduciary responsibility and the independence of the advice you receive.
  4. You have the right to expect to receive information about the full range of options available to you, not just those which preserve your representative’s income and health plan carrier’s revenue.
  5. You have the right to receive comprehensive reporting of your costs, and the potential drivers of those costs including benchmarks relative to something you can manage against, try Medicare payment levels since they represent the largest payer in the country and are publicly available.
  6. You have the right to receive answers to all of your questions. This means no cloaking responses with HIPAA Privacy or other “confidentiality/proprietary” curtains.
  7. You have the right to expect those you hire to adjudicate and manage benefits to give their best effort in identifying inappropriate and grossly inflated charges before they issue payment.

After 25 years in the business, with the last 15 pursuing these healthcare rights, I already know the answers you will be shocked to uncover. There’s a lot employers can do to reduce healthcare expense. But first, you need the facts to mark your starting point.

Learn more at www.advancedpricing.com

Mike Dendy, MHA/MBA Mike joined AMPS as Chief Executive Officer in February 2005. Mike is first and foremost a consultant, visionary, writer and teacher specializing in strategy for the payment integrity space. As a recognized thought leader, Mike’s educational, yet entertaining, style has made him one of the most visible and requested spokespeople, helping self-insured employers protect their bottom lines.