Healthcare Cost-Containment Strategies

Kevin Flanagan and Charlene Wallace

In 2009, annual healthcare spending in the United States reached $2.5 trillion. This unprecedented level of spending accounted for almost 18 percent of the U.S. gross domestic product (GDP). This same year in New Hampshire the cost of healthcare amounted to $10.0 billion. Similar to national rates, 18 percent of New Hampshire’s GDP was for healthcare expenditures.

As rates of illness and chronic disease continue to rise, healthcare utilization continues to increase. This, combined with inefficient use of medical services, expensive new technologies, defensive medicine, overcapacity and disparity in treatment pathway quality, has led to escalating health insurance and prescription plan costs. In fact, by the year 2018, national health care expenditures are predicted to reach $4.4 trillion!

According to a 2011 report published by the Kaiser Family Foundation and Health Research & Educational Trust, average annual health insurance premiums have risen 113 percent between 2001 and 2011.

In 2011, with average annual medical plan premiums of $5,429 for single coverage and $15,073 for family coverage, and medical trend expected to increase 8.5 percent next year, employers and employees are both concerned with affordability.

Factors such as the introduction of new and expensive technologies and an aging population cannot be impacted by employers or employees. However, there are cost drivers that can be affected.
Cost-shifting as a result of Medicare and Medicaid funding reductions has a significant impact on healthcare premiums. Changes to address this and costs associated with malpractice litigation and uncompensated care would have a significant impact on overall healthcare costs.

Less esoteric, but with more of a direct impact, employers and employees can focus efforts on several alternatives:

  • Wellness initiatives and support for positive employee lifestyle behaviors
  • Consumer and provider incentives
  • Medical and prescription drug plan design changes

Employers and employees have an interest in pursuing alternative solutions and need to work together to make difficult decisions. The first step is to educate all parties to the various components involved.

Employers need to understand insurer underwriting policies, review data to identify specific cost drivers and then implement programs that target those drivers.

Start by developing a multi-year strategic plan regarding employee benefit packages. As part of a long-term strategy, pursue plans that eliminate barriers to care and provide incentives for complying with recommended preventive care and for effectively managing chronic conditions.

Employers should consider cost-effective plan designs that encourage employees to be wise consumers. Plans that require employees to share more in the cost of care, with higher copays, deductibles for certain high-cost care like inpatient treatment or high-cost diagnostic services or annual maximums for certain specialty services, typically are much less expensive than plans without those components. Employees may find it palatable to share more in the cost of care if they are allowed to pay less out of their paychecks toward the cost of the plan.

In addition, there are several alternatives to managing prescription drug spend. On average, prescription drug costs represent in excess of 20 percent of total health plan expenses and, in some cases, even as high as 30 percent. New and expensive medicines continue to come to the marketplace, and they are marketed directly to consumers and providers. Some of these medicines may not be any more effective for the majority of patients than what is currently available. While it’s important that patients who experience significant health benefits from newly developed medications have access to these drugs, it’s also important to ensure that these medications are prescribed only to those truly in need. Most prescription benefit plans have options available to minimize this effect, such as programs like step therapy, prior authorization or automatic generic substitution. Some plans require enrollees to pay the difference between the cost of the generic form of a medication and its brand name when there is no clinical reason to utilize the brand.

Additionally, individuals need to be educated on the importance of consumerism as it applies to personal healthcare. Once there is an understanding of the costs associated with healthcare and the effect personal choice and behavior has on driving those costs, individuals become empowered to make better decisions and to become active participants in managing those costs. Employers and employees working together to take an active role in managing plan costs can improve the overall health of the most valuable resource, the human resource, while reducing medical trend costs.

Near-Term Answers
Increasing employee cost-sharing contributions toward medical insurance and prescription plan premiums, higher deductibles, increased co-payments, shifting from indemnity to managed care networks and moving from retail to mail-order prescription plans are some of near-term actions employers are currently taking to decrease health care costs. The challenge here is that there is a limit to what plan design modifications can do to impact and sustain lower healthcare costs over the long-term.

Investment for Long-Term Sustainable Solutions 
According to the U.S. Centers for Disease Control (CDC), there are four primary determinants of health. These four factors and the levels of influence they have on our health include: access to care (10%); genetics (20%); environment (20%); individual lifestyle behaviors (50%). Given that individual behaviors have been found to have the greatest impact on health, it is alarming to observe that almost 90 percent of the $2.5 trillion we spend as a nation and 90 percent of the $10.0 billion we spend in New Hampshire annually as of 2009 occurs after people become sick. Compare this to only five percent spent on promoting healthy lifestyle prevention both at the national and state levels and it becomes obvious that we appear to be experiencing a case of misaligned resources.

Health and Productivity Management
Health and Productivity Management (HPM) is defined as the “integrated management of health and injury risks, chronic illness and disability in order to reduce the cost of employee health and injury-related costs including direct medical expenditures, unnecessary absences and lost performance at work.” HPM focuses specifically on identifying risks that can lead to negative financial impact to an organization. The objective of HPM is to reduce identified risks systematically by developing and implementing loss prevention interventions. Administrative and policy changes, educational programs emphasizing health and safety awareness, and individual health incentives are examples of interventions that can lead to positive economic results. At the individual level, positive behavior changes can lead to healthier, happier and more productive employees, which in turn will lead to a similarly productive workplace culture. The potential economic outcomes of Health and Productivity Management include decreased costs in health insurance, workers’ compensation, disability and sick leave. Non-economic gains include increases in employee productivity, morale, job satisfaction, retention and recruitment rates.

Population Health Management
Population Health Management (PHM) focuses on creating the most effective and efficient health interventions possible, which target a well-defined population, for example a pool of public employees and their families. The goal of PHM is to "attain measurable improvements in outcome metrics for health, functional status and economic results—including reduced healthcare expenditures." PHM provides members within a given population a variety of resources they can use to individually improve the health and safety of themselves and their families. Health assessments, individualized health coaching, health awareness programs and preventive screening incentives are examples of the components which make a Population Health Management program succeed.

Education to Address Medical Consumerism
Recently, the CDC estimated that Americans went to hospital emergency rooms 114 million times for the year. Additionally, the CDC determined that more than 55 percent of emergency room (ER) visits were to treat non-urgent conditions. Considering that an ER visit can be up to six times the cost of receiving care in a doctor’s office, it becomes clear the amount of unnecessary spending that is occurring within our healthcare system. Employees who are aware of the greatly varied costs of healthcare are able to make more money-saving decisions as educated medical consumers. Programs that provide employees Explanation of Benefits statements for medical treatments and prescription drug charges can be effective at increasing awareness of healthcare costs. Workplace seminars on medical consumerism and self-care are part of a good strategy to educate workplace employees as a group. A number of websites exist that compare hospitals and healthcare procedures in terms of cost and quality of services provided. Additionally, medical plan options have expanded to include programs that provide financial incentives to individuals who do choose to use high quality but lower cost healthcare services.

Integrated Workplace Health and Safety Programs
For employers, employee time is money. That’s why health and safety training at the workplace needs to be efficient and effective. A best practice approach is to implement programs that provide a combination of health and safety education. For example, an employer providing a chainsaw safety class to its public works department could also integrate a lunchtime talk on healthy eating or smoking cessation. A stress management or fitness program could be combined with a driving safety course for police and fire departments. Another benefit of health and safety program integration is that it fosters trustful relationships between employer groups who traditionally maintain close-knit cultures.

Data-Driven Strategies
The best cost containment strategies are those based on quality information. Objective data analysis enables the development of targeted health and safety risk management programs that will effectively result in positive economic outcomes. Aggregate group reports on medical claims, prescription drug cost and utilization, workers’ compensation, property-liability claims and Population Health Management reports have been proven to be highly important information resources upon which best-practice cost-containment programs should be built. The most effective way to contain costs is by proactively managing health and safety risks: property-liability and workers’ compensation claims reviews should be conducted on a quarterly basis, and healthcare and prescription drug utilization should be examined on an annual basis.

Effective cost containment programs involve a number of coordinated activities. Key success factors include employer administration support to encourage high rates of employee participation. Asking insurers what type of cost-containment resources they can provide your organization is a good place to begin. Health and safety programs should be offered to employees as a group in the workplace and at home as individuals. Interventions for employees and their families include health assessments, online educational tools and incentive programs to encourage healthy lifestyle behaviors. Educating employees on the costs of healthcare and providing them information so they can become informed medical consumers leads to more efficient and lower cost healthcare utilization. The most effective cost containment programs are those which are evidence-based and custom designed according to claims data analysis.  

Kevin Flanagan is LGC Assistant Manager for Member Relations; contact Kevin at or 800.852.3358, ext. 236. Charlene Wallace is LGC Senior Benefits Administrator; contact Charlene at or ext. 202.

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