To Cut Healthcare Costs, Companies Find Safety in Numbers

Health care is consuming an ever-greater share of corporate America’s balance sheet. According to the latest Kaiser Family Foundation survey, employers today spend $12,591 on average for family coverage — a 54 percent increase since 2005.

Some companies have finally had enough. Twenty of America’s largest corporations — including American Express AXP -0.18%, Coca-Cola KO -0.53%, and Verizon — recently formed a coalition called the Health Transformation Alliance. They’re planning to pool their 4 million employees’ healthcare data in order to figure out what’s working — and what’s a waste of money.

Eventually, they could leverage their collective purchasing power to negotiate better deals with healthcare providers.

It’s a worthwhile experiment. Government has largely failed to rein in spiraling healthcare costs; in fact, by over-regulating the healthcare marketplace, it’s largely made the problem worse.

The private sector will have to take matters into its own hands — and find ways to creatively deploy market forces to its benefit.

Collectively, U.S. employers provide health coverage to about 170 million Americans. Since many pay part — if not all — of their workers’ premiums, they’ve borne the brunt of the upward march of healthcare costs. According to the Kaiser Family Foundation, premiums for employer-based family insurance have increased 27 percent over the last five years — and 61 percent over the last ten.

Unfortunately, this growth won’t slow anytime soon. The Congressional Budget Office estimates that average premiums for employer-based family coverage will reach $24,500 in 2025 — a 60 percent increase over premiums today.

Companies are understandably desperate to find ways to curb their healthcare spending.

Last year, one of every three employers reported increasing cost-sharing for employees, through higher deductibles or co-payments. Another 15 percent said that they cut worker hours to avoid falling afoul of Obamacare’s employer mandate, which requires firms to provide health insurance to anyone working 30 or more hours per week.

But shifting costs elsewhere simply masks employers’ health-cost problem. They’ll have to address inefficiencies in the way that health care is delivered in order to bring about savings that will actually stick.

The Health Transformation Alliance sees three primary ways to do so.

First, companies will have to mine their healthcare data for insight — just as they analyze the numbers for sales, operations, and other core business functions.

The Alliance will examine de-identified data on employees’ health spending and outcomes. The hope is to determine which providers are delivering the best care at the lowest cost — and then to direct workers toward these high-performing providers.

The U.S. healthcare sector today is awash with ambiguity and a lack of transparency. A knee replacement can cost $50,000 at one hospital but $30,000 at another. Two hospitals may offer the same price on a procedure — but one may have a higher rate of infection.

Such differences matter. According to a 2013 report in the Journal of the American Medical Association, an infection can add an extra $39,000, on average, to a surgery’s price tag.

Second, employers will have to use their combined buying power to secure better deals on health care. “If you brought together multiple employers you would have more leverage, more covered lives, more coverage throughout the country in terms of regional scope,” said Tevi Troy, CEO of the American Health Policy Institute, the organizing force behind the Alliance.

In other words, there’s safety — and potentially lower healthcare costs — in numbers.

Third, employers will have to educate their workers about how they can secure better care at lower cost.

Most consumers are clueless about where they should seek health care. They may welcome a gentle nudge from their employer toward a high-quality, low-cost clinic or provider. If it saves their bosses some money, all the better.

And as the Alliance hopes to prove, it’s a lot easier to borrow another company’s successful strategy for executing those nudges than to create one from scratch. An educational campaign that resonates with Verizon’s 178,000 employees, for instance, may do just the same with IBM’s IBM +0.28% 300-some-thousand staffers.

As Marc Reed, chief administrative officer of Verizon, explained: “What we’re trying to do is to make this sustainable so that kind of coverage can continue.”

Corporate America has been saying for years that it cannot afford the healthcare status quo, with costs rising ceaselessly. But if employers use their healthcare data wisely — and capitalize on their collective bargaining power — they may discover that salvation from their health-cost woes lies within.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

Scroll to Top