Opinion: Want to Cut Health Costs? Focus on Your Human Capital

A health-promoting benefits package is the key to cultivating great employees

By Michael Puck, SPHR Apr 6, 2010

If you asked almost any CEO 20 years ago what the single defining trend of the foreseeable future was, the one thing that was going to propel industry to the next level of productivity, success, and profitability, chances are they would have said automation of the workplace. People across all industries saw the reduction of dependence on a human workforce as the single most cost-efficient step forward they could make.

Fast-forward to 2010, and attitudes have taken a 180-degree turn. Automation, the Internet and worldwide connectivity have homogenized most industries to the point where companies are struggling to differentiate themselves from their competition in the public’s increasingly critical eye. So how does a modern company propel itself into the future? What single component can increase a company’s efficiency, define its brand and literally revolutionize the general public’s opinion of it? Human capital.

The Cost of Attracting and Retaining valued Employees

A solid benefits package is the key to cultivating a great group of employees that can keep a company running smoothly. Indeed, among job hunters the strength of a benefits package is nearly as important as total salary, in some cases (especially those where a potential employee is providing for one or more dependents) more so. Therefore, if you’re looking to hire the best, most productive employees you can, you must be prepared to pay the price.

The average cost of a comprehensive benefits package in the United States is rapidly approaching 40 percent of overall payroll expenses. The main reason for that is because health care, the primary component of any competitive benefits plan, is extremely expensive—as much as 11 cents per payroll dollar. In fact, American companies spend 16 percent of the United States’ GDP on health care alone.

Broken down into smaller bites, the cost is still staggering. In 2009, companies paid an average of $10,743 per employee per year in health care premiums. That figure has increased 131 percent in the last 10 years and is forecast to increase $28,530 (161 percent) over the next 10 years without significant changes, according to a report from Hewitt Associates, sponsored by the U.S. Business Round Table.

Cost Cutting: The Good, the Bad and the Revolutionary

So, when a company is looking for ways to trim what appears to be excess expenses out of a budget, many target health care, and rightly so. The system is inherently broken; it exists not to serve the public who partake of its services but as an independent entity designed to make a profit for itself. While that’s not necessarily a fatal flaw, it does contribute to three of four main drivers behind the increases in health care costs that every company must deal with to remain profitable.

The following cost drivers are imbedded in the American health care model, and they are likely to remain despite health care reform:

  • There exists no real impetus to cure patients when a viable treatment exists. This goes for both the medical treatment industry and the pharmaceutical industry. It is inherently better for them to have many sick patients requiring “maintenance” treatments than it is to provide a one-time cure. It’s best to realize this driver is not, for the most part, intentional—as most doctors and hospitals do truly have the best interest of their patients in mind—but rather an unintentional byproduct of the model.
  • As medical therapies and technology increase in complexity, the cost of applying those breakthroughs increases exponentially. CT scans cost more than X-rays, laparoscopic surgery costs more than traditional open surgery, joint replacement costs more than corrective surgery—these new treatments require more resources, better equipment and more skilled specialists than the alternative traditional treatments. True, these newer treatments are safer and often have better results for the patient, but the cost to the hospital (and therefore to the insurance company paying the hospitals on behalf of the patient) is tens of times greater.
  • The third-party payer system removes the element of responsibility from the end user (in this case, the employee). With the rise of third-party insurance companies, the shock value of actually having to pay for expensive medical treatments has been removed from the equation. Employees may feel outraged at a $1,600 bill from a surgeon for a procedure but often do not understand that the insurance company has already paid out $10,000. If employees don’t truly understand the value of the benefits provided for them, they never really understand the true cost to their employer.

So “attacking” health care is a logical strategy to reduce costs; however, where most companies err is in their approach. For decades, the preferred methods of combating health care costs have been to decrease benefits, to increase the percentage of the cost the employees must pay or to limit access to medical services. While these methods are effective in lowering costs in the short term, this approach is fundamentally flawed.

Companies that use these methods of cost cutting are only shooting themselves in the foot. By altering their benefits package in such a manner, they make themselves a less attractive employer to new hires, create discord between management and lower-level employees, and may even face employee exodus on a scale larger than they are capable of handling. All of this contributes to a massive “brain drain” in human capital. Valuable employees are lost, and viable replacements cannot be found.

The One and One-Half Cost Drivers Companies Can Control

While the aforementioned three cost drivers behind the skyrocketing cost of providing quality health care are, for the most part, out of the employer’s hands, there is one driver that companies can influence. In fact, that single factor may actually be responsible for most of the cost increases insurance companies are levying; by combating it, employers can have a much more significant effect on their bottom lines than through traditional cost-reduction methods. Many can decrease the real dollar amounts they pay out in benefits claims and also improve the efficiency of their workforce all while truly making a difference in the lives of their employees.

What is this miracle lever? You've heard it before, but that doesn't make it any less true. It's the health of the employed population.

The facts are cold and hard: Americans are unhealthy. When considered in concert with the global community, the U.S. ranks 50th in terms of the overall health of its inhabitants.

Obesity is the chief contributing factor to all three of the top killers in America (heart disease, stroke and cancer). It’s also the chief contributing factor for one of the most debilitating and costly long-term chronic conditions ever to attack the health of an employee: diabetes. When you combine that knowledge with the fact that 30.7 percent of Americans are dangerously obese, you get a costly recipe for disaster amounting to $125 billion per year.

Smoking is the leading contributing factor to cancer and various forms of lung disease, all of which are among the most costly to treat and cure, yet 17 percent of Americans smoke. That adds up to $150 billion per year spent on diseases that are completely preventable.

It’s no secret that chronic conditions cost insurance companies (and therefore employers) more money than anything. A recent study by the Centers for Disease Control and Prevention found that 75 percent of all health care spending is related to those chronic conditions.

Cut Costs the Right Way

The key to reducing the amount paid in insurance premiums and payouts is ensuring the relative health of a company’s employees (and their dependents). However, many companies shy away from programs that can truly affect both their payouts and their employees’ health for fear of failure or because of the inability to prove a return on investment. The truth is that a well-structured, goal-oriented health care cost management plan is not only the best way to radically decimate the amount a company pays out, but such a plan can also freeze a company’s health care spending. Some companies have reported freezes for up to five years (several examples are given in SHRM's article Practices Shared for Lowering Costs, Improving Health).

A goal-oriented health improvement plan puts the health of a company’s employees and their dependents directly in their hands. The key to its success is ensuring that those employees are motivated enough to take action and actually improve their health. This is where the employer comes in. By providing enticing incentives and monitoring the progress of employees along a health-improvement continuum they’ve created with their own health care provider, employers can align their interests (cutting the amount paid out to insurance companies) with those of their employees (“earning” extra money and effectively increasing their overall compensation).

This alignment results in a workforce that is actively decreasing its own health risks, which directly benefits the employer in the form of decreasing payouts and smaller premiums. This may sound like a long-term approach, but many of the companies that have tried this method of cost management have seen significant results in just three to five years.

Another often overlooked benefit of having a healthier workforce is increased productivity. Healthier employees spend less time away from work, have fewer work-related injuries and spend less time operating at reduced capacity.

Prosperity Through Investing in Human Capital

Many companies see the health care cost storm brewing on the horizon; others have already felt the power of its wrath. Many have tried to combat it through ineffective methods or outdated techniques. Very few have taken the time to truly understand the root cause of the problem and the truly revolutionary effect they can have on their health care costs by investing in their human capital—increasingly becoming the most important component of a given company’s competitive edge. By improving the health of their employed population, combating preventable chronic conditions (which are responsible for 75 percent of all health care spending) and working with their most important assets, rather than against them, companies can encourage a paradigm shift and come out on top.

Michael Puck, SPHR, is benefits practice leader for 33,500 employees of a global defense, security and aerospace company, author of "The High Road – Total Health Care Cost Transformation Program" and founder of www.8020wellness.com.

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