Openness to new ideas: the only cure then and now. Entry 24, 2009

It is not hard to learn more. What is hard is to unlearn when you discover yourself wrong (1). ~Martin H. Fischer

In the frightening time of the Black Plague, many held strong beliefs about how the disease spread. Clergy claimed it was a punishment directly from God; Hippocratic physicians said it was an imbalance of the body’s four humors; Astrologers attributed it to the proximity of Jupiter, Saturn and Mars; the public was told that bathing and exercise were risky because they opened one’s pores; some even said it could be passed through an evil stare (2, 3). We can only imagine the pervasive panic, fear and misunderstanding that drove people to all sorts of ineffective “preventive” behaviors.

Even when the true cause of the Plague was discovered, I wonder how long it took for people to actually believe the real scientific explanation, or begin bathing and making eye-contact once hearing that their previous beliefs were incorrect.

While we may think of ourselves today as a scientific society—able to release established beliefs and modify our approaches when new information comes along—maybe we aren’t so different from our medieval ancestors. All tightly-held beliefs are scary to let go.

First, an admission: I have been through my own sort of Dark Ages, holding on to an entrenched way of thinking, perpetuating what I ultimately learned was a counterproductive approach to health and healthcare management. Ten years ago, I believed that I understood the primary causes of high health care costs and utilization. I was paid to speak and write about it—which I did to the best of my ability. The process of discovering that I was, in fact, wrong, struck me as—in order—puzzling, humbling, frightening, and then enlightening and even promising. But I admit, early in the uncomfortable phase of learning a new paradigm, it was tempting to simply say, “Don’t tell me,” or “This is irrelevant,” knowing that no one would likely ever find out. It was the first time I understood the meaning of “ignorance is bliss.”

I needed to admit I had been wrong, or at the very least overly narrow, in my perspective about corporate health and the causes of sharp increases in healthcare costs.

Truly, I understand that changing our minds is not easy, and can even be threatening to our egos and livelihoods. But I also discovered that admitting I was wrong led to real solutions and brought meaningful contribution to a field in need of new ideas.

Whew. New explanations come as a relief.
Once I got over my dread of admitting I was wrong, it was an incredible relief to understand WHY THINGS DIDN’T WORK the way I expected. I could now explain why medical costs were high in groups who were supposedly very “healthy.” I could explain why the same health program could succeed in one organization and fail miserably in another. The perplexing mysteries of why two people with the same disease could behave so dramatically differently suddenly weren’t so mysterious any more.

Essentially, the new ideas were these: What if the relationship between health status and benefits costs has been vastly overstated? And instead, we can explain a lot about healthcare costs and business outcomes using economic observations like these:

1. Overall, medical costs are an inaccurate measure of health status. Two people with the same illnesses at the same level of severity will not seek or receive the same healthcare services. Many, many other factors—especially economic, but also social, occupational, beliefs and perceptions—will influence how much healthcare different people demand and consume (4).
   
2. Rates of disability insurance claims are a poor indicator of significant healthcare needs. Rates of disability vary dramatically due to economic incentives, wage compensation, job and family circumstances (5, 6).
   
3. Medical cost differences between groups reflect a wide array of factors, surprisingly little of which is health status. Particularly when business practices or benefit designs create perverse economic incentives, healthcare cost differences are nearly impossible to trace to actual differences in health status or geography (4).
   
4. A population getting more care is not necessarily sicker, nor are they getting better care for each additional dollar spent. Too often, it is quite the opposite (7, 8, 9).
   
5. Use of healthcare and disability insurance is not proof of medical problems or always reflective of severity. If someone interacts with the medical system, he or she will receive a medical label simply because there is no other way for physicians to bill for their services. If the cause of a visit is more socially-driven than medical, the claim will still be labeled as medical.
   
6. Health intervention programs, while well-intended, are rarely an employer’s best chance at reducing healthcare and absence claims. Most employers can have a greater impact on the costs AND health of their workforces by altering non-health-related practices (such as compensation, paid time-off, manager training and other factors) than by intervening to try to influence an individual’s health status directly (10, 11).
   
7. If we only look at indicators of medical problems, we will only find more disease-focused solutions to try. As they say, if you only have a hammer…everything looks like a nail. Attempts by employers to improve health will not manage costs unless other factors are aligned first.
   
8. When a company aligns its business practices in ways that help employees be successful at their jobs, healthcare costs go down and employees pay more attention to their own well-being. The side-effect of good business practices is better health—meaning that maybe we have been trying to solve the health problem in the wrong way (12).

There’s no going back.
Before, when I was advocating that the best way to reduce healthcare costs was to add an ever-growing list of health improvement programs in every company, this list of statements was frightening. How would I explain my previous recommendations? What might my colleagues say? (And they did say: “What HAPPENED to you?”).

But, faced with strong economic evidence and clear, repeated examples, there was no denying it. There is a better way to improve health, enhance business performance, and save money; I couldn’t honestly say otherwise. Most gratifying, what I learned was helping improve the health, careers, and business performance of workers and organizations.

Many people I talk to like the other explanation better.
And to them: I get it. New answers can be threatening to our belief systems, egos, and careers.

But new answers also help us explain more, achieve better outcomes, and become more efficient. For the sake of future companies and employees, I hope those folks reconsider. Who knows, like bathing, maybe it will make the world a better place?

Why this matters: Resistance to new ideas, especially disruptive ones, is natural. Life seems easier when we can stick with what we know. But there are significant opportunities to improve both health and business outcomes by changing the way we understand the drivers of cost. A new understanding of a problem can reveal different—and sometimes better—solutions.
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References
(1) Fischer, M. H. Science Quotes by Martin H. Fischer (accessed November 20, 2009).

(2) Benedictow, O. J. The Black Death 1346-1353: The Complete History. DS Brewer; Feb 2006.

(3) Britain Express. The Black Death in England 1348-1350 (accessed November 20, 2009).

(4) Self-Care Institute. Demand Management Handbook. Washington, DC: Partnership for Prevention; 1996.Health as Human Capital Foundation.

(5) Money matters in decisions about disability. Entry 2 - 2005 . Sep 27 2005 (accessed November 20, 2009).

(6) ---. Getting value from health benefits: Use them or lose them Entry 18 - 2007. Aug 26 2007 (accessed November 20, 2009).

(7) Lynch, W. D.; Edington, D. W., and Johnson, A. Demand management. Predicting the demand for healthcare. Healthc Forum J. 1996 Jan-1996 Feb 28; 39(1):20-4.

(8) Fisher, E. S.; Wennberg, D. E.; Stukel, T. A.; Gottlieb, D. J.; Lucas, F. L., and Pinder, E. L. The implications of regional variations in medicare spending. Part 1: the content, quality, and accessibility of care. Ann Intern Med. 2003 Feb 18; 138(4):273-87.

(9) --- The implications of regional variations in medicare spending. Part 2: health outcomes and satisfaction with care. Ann Intern Med. 2003 Feb 18; 138(4):288-98.

(10) Health as Human Capital Foundation . How much does health drive healthcare costs anyway? Entry 20 - 2009. 2009 Sep 27 (accessed October 8, 2009).

(11) ---. Part IV: Business Practices—A major, modifiable driver of healthcare costs. Entry 21 - 2009. Oct 11 2009 (accessed October 22, 2009).

(12) ---. Money Matters. What do skinny people in big houses have to do with flu shots and bonus pay? Entry 11 - 2008. May 26 2008 (accessed June 5, 2008).

Letting employees manage their own time off? Maybe it’s a win-win. Entry 23 – 2009

At the Health as Human Capital Foundation, we often witness scenarios where employees, when given the choice and proper incentives, actually spend company time and money MORE wisely than they would under a strict set of rules or governing policies.

This is just that sort of example.
Most every company we work with has an extensive paid-time-off policy, detailing what days are allowed, for what purposes, and at what times during the year. There are extensive rules governing its use and tracking their frequency. But it’s worth asking: even when companies spend time and energy defining a thoughtful policy and system, is there an exact amount of time off from work that suits each of us perfectly? What if we allow workers some discretion in how much time off they want?

At a recent luncheon, I spoke with an executive who felt strongly that companies should designate a required amount of time off and was uncomfortable with the notion of letting employees decide how much to take. He couldn’t articulate why, just that generally people might not know what was “good for them.” I wondered, does any CEO know what employees need more than they do?

Let’s look at an example where a company allowed employees to decide whether to use their time off or take home more pay…

The graph above shows what happened when a company (in a service industry) decided that after a base accumulation of days off, employees had the option to cash-in unused days for 100% of wage value instead of using them. In the two years after that policy began, employees, at their own discretion, took 1.3 fewer days off per quarter, dropping from a total of about 32 to under 26 days per year (about 16% fewer). (Click on the graph to enlarge)

In a population of 4,000 employees, this is 20,000 days or about 80 FTEs—2% of the workforce—who were on the job instead of absent.

A Win-Win: This company reduced absence and allowed its people to earn more. Should all employers consider a cash-in option?

The potential benefit of allowing people to work more probably depends on at least two assumptions:
1) There is enough work that employees are needed on extra days,
2) There is no harm caused by allowing the person to work more.

Let’s presume the first item to be true most of the time: more employees are needed to do the work. Most frequently, when I hear arguments against allowing employees to cash-in days, they pertain to the second issue—harm.

Certainly there are jobs where public safety is a concern: pilots, truck drivers and crane operators are great examples, where the government actually intervenes with laws that restrict overtime and work hours to protect public safety. But what about the vast number of office workers who are not a concern to public safety? In such a workforce, is there an absolute minimum number of days off a person requires to be productive and function optimally? And must those be PAID days?

Consider self-employed workers and entrepreneurs. If there was ever a group of workers that we respect, it’s the self-starting, entrepreneurial risk-taker who stakes out on his or her own to do something new and innovative. Isn’t it true that self-employed workers are in charge of their own schedules, earning money when they work, and not earning money when they don’t? This population is a clear example of workers who have complete control over their time, and good incentives to spend it wisely. Do we worry that all self-employed people will harm themselves by working too much? I don’t.

Reactions to the work-more option.
In addition to the reaction I heard from my lunch companion—that employees don’t know what’s good for them—I have also heard that making employees choose between more pay and time off is “cruel,” and that government workers are “owed” more time off because their base salaries are so low.

What I rarely hear is the basic economic truth: mandatory paid time-off comes at the direct expense of higher pay. When companies budget an employee’s total compensation, they allot a specific portion to paid time-off—a portion determined by the company. Remember, pay usually reflects value produced by the average worker in a specific job. If we plan for employees to work 90% of the year rather than 100%, pay will be 90% of what we would expect if they worked all year.

What if you have a worker who trains and competes in marathons and wants six weeks off every year (and is willing to sacrifice pay for that option), and another worker saving up money for a new house who would rather take two weeks off and get paid for the rest? If the official policy is four weeks, it meets neither of their needs.

Within the bounds of a) a minimum amount of work days we need an employee to perform adequately, and b) a maximum that prevents a safety risk, why must companies decide on a worker’s behalf? In the example above, the company’s assumption about how much time off employees want and need was 16% wrong before they changed their policy to give employees a choice. Clearly, some people will choose money rather than more time off.

At the very least, explain to employees how time off fits within total compensation.

Our research indicates that when employees understand—and see evidence of—a direct connection between their compensation and business success, they tend to have higher levels of productivity and lower utilization of discretionary benefits.

A good starting place is itemizing everything the company pays while a worker is employed: wages, plus training, plus payroll taxes, plus healthcare, plus life insurance, plus time off. Seeing how much of total compensation does NOT go to wages and performance pay helps open the door for conversations about how the company allocates its human capital investments, and how that allocation could change for mutual benefit.

Too often employees hear what “they get” once per year (if that), rather than an ongoing dialogue about how effort and attendance translate into business success—and how lower use of benefits can result in greater allocation of resources to bonuses, profit sharing or training opportunities.

Be straightforward and transparent with employees about how money gets spent, and consider giving them an option to use it in ways that fit their ideal mix of work and home life. Perhaps it is time to trust that their choices may produce a win-win.

Why this matters: One size does not fit all when it comes to paid time-off. There are situations where workers will choose to work more, or less, than the company designates. Further, connecting pay to attendance reminds everyone that business success results from the work we do, not just the people we hire.

When someone else pays, you simply care less (and spend more). Entry 22 -2009.

Do you honestly believe that individuals deserve the right and responsibility to make their own choices about health care? Before you answer, remember, the ultimate decision-maker is the one who spends the money. So, giving individual patients control also means putting them in charge of healthcare dollars.

When it comes right down to it, most people say they support patient rights, but only in the context of someone else paying the bill. Here’s why those two issues cannot be separated:

When discussing health savings accounts with employers, I often hear concern that connecting financial factors to health decisions will lead to employees making bad choices (mostly by not getting the care they need). I hear a widespread belief that asking people to take financial accountability for healthcare produces negative outcomes, not positive ones.

Rarely do I hear policymakers acknowledge that the opposite is also true. Actually, when we remove financial accountability we actually expose people to risk because we encourage people to stay uninformed (1). Economists use the term “rational ignorance” to describe instances where the cost of becoming informed exceeds the perceived value and hence people remain rationally ignorant.

If you understand that all medical procedures—especially those done unnecessarily—contain inherent risk, then remaining uninformed increases the risk associated with healthcare decisions. (For a refresher on why more is NOT necessarily better for patients, review the wonderful work of Fisher and colleagues (2, 3).)

Rational Ignorance
Because it takes time, effort, and sometimes money to be informed, we choose where to place our energy, attention, and resources. Like any other endeavor, why go to the trouble if the potential benefit isn’t greater than the cost? Under normal circumstances, there is much to be gained by being informed:

• Money Saved (by comparing prices of different brands and stores);
• Value Gained (by comparing what we can GET for the price);
• Time Saved (by knowing an option is closer or easier to use);
• Best results (by knowing how to use the item you get—e.g., medicine—appropriately, you have a better chance of it working); and
• Personal Control or Preferences (the satisfaction, peace of mind, or other personal preferences that are met when you decide what’s best for you).

BUT—it also takes work.

Two factors ultimately influence whether we decide to become informed about a topic: the value one perceives getting out of it (in the many forms described above), combined with one’s ability to influence the eventual decision or situation. If we feel we have no influence, and it doesn’t really bring us personal value anyway, why spend the time and energy to be informed? Rationally—we wouldn’t. Rationally, we remain ignorant.

For example, unless it is a rare topic that affects us in a significant way, few voters invest significant time and energy understanding the referenda on the ballot, because we don’t feel like our vote will influence what happens anyway. Why bother?

Think about it: most of us know a lot more about the features on the cars we might purchase (which involves our choice and our financing) than we know about which doctors in our community deliver the best care for the best price.

Compare medical services to other activities and needs in our life:

When choosing how to spend our money:
When you bought your house, did you look at prices in that neighborhood to see if you were paying a fair price? Did you investigate whether the neighborhood was safe, and have an inspection to be sure the value of the house was accurate?

When choosing how to spend our time:
Do you read reviews or ask friends about movies or books before you buy them?
On your last vacation, did you research different activities in the area, to best meet your expectations for the trip?

Remarkably, medical care is one of very few services we “purchase,” while knowing almost nothing about the cost, the quality, and without guarantee from the person providing it.

We stay rationally ignorant about healthcare because we know someone else is in control.

While healthcare reform is big news and evokes high emotion and political interest, most citizens are not particularly informed about the specifics. Virtually all of the proposals still ensure that someone else pays for the majority of the cost of care, and that someone else will decide what type of care will be allowed.

Regardless of whether the “someone else” is government or a private insurer, consumers will remain largely uninformed and disconnected from all related information—including price, safety, and quality. Not because agencies won’t attempt to make information available, but because the cost of becoming informed exceeds its value. Unless we have great experience, influence or resources, we know we are not in control anyway.

The Ethics of Health Care Reform, published by the non-partisan Institute for Policy Innovation last summer, compared six different models for providing health care and concluded that none was ideal (4). However, they came to the following conclusion:

“There is only one system that promotes patient choice, and yet still maintains the elements of a well-functioning health care system that ensures access to quality care while keeping costs under control: the consumer driven model” (p. 8). (It was a high-deductible plan with a funded HSA.)

While not using the term “rational ignorance,” the report focused on the patient as the rightful decision-maker. “When a third party—government, insurer or employer—controls most of the health care funds, that entity eventually becomes the decision maker, not the patient” (p. 4).

Payment equals control.
The party with the purse strings decides who gets paid, for what, and how much. It’s a simple equation. Thus, anyone who truly agrees that the consumer/patient should be the rightful decision-maker must also agree that consumers should have control over the money spent. Deciding and paying are one in the same.

When we insist that patients should decide about care, but only within the context of a third-party payment system, we create an illusion of patient influence. Patients understand that someone else—a doctor or an insurer—will be granting ultimate permission. This explains why most of us remain ignorant—rationally.

Some will insist that healthcare decisions are far too complex and/or dangerous for patients to make without a doctor acting on their behalf. We disagree. While patients may need or want support in understanding options, that support should come from a person who first and foremost serves the patient. Doctors are humans, influenced by incentives and rules (inherent in the payment mechanism); their advice will reflect who is paying them, and for what. That alone should remind patients that control of payment is an important component of healthcare decisions.

Why this matters: Protecting people from financial responsibility for healthcare exposes them to risks by encouraging them to remain uninvolved in care decisions. Payment decisions cannot be separated from care decisions because true ownership requires control of both. Regardless of which third-party we place in charge, patients will remain disenfranchised and rationally ignorant—meaning costs will continue to rise and quality suffer. Consider this as we watch reform evolve without meaningful patient involvement.
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References

1. Downs A. An Economic Theory of Democracy. New York: Harper; 1957.

2. Fisher ES, Wennberg DE, Stukel TA, Gottlieb DJ, Lucas FL, Pinder EL. The implications of regional variations in Medicare spending. Part 1: the content, quality, and accessibility of care. Ann Intern Med. 2003;138:273-87.

3. Fisher ES, Wennberg DE, Stukel TA, Gottlieb DJ, Lucas FL, Pinder EL. The implications of regional variations in Medicare spending. Part 2: health outcomes and satisfaction with care. Ann Intern Med. 2003;138:288-98.

4. Matthews M. The ethics of health care reform. Institute for Policy Innovation Issue Brief; July 20, 2009. Accessed October 22, 2009.

Part IV: Business Practices—A major, modifiable driver of healthcare costs. Entry 21 - 2009

In the previous blog, we covered three out of the four drivers of healthcare costs:
1) Basic costs & bad luck;
2) Demographics and labor market; and
3) Health status.

We learned that #1 and #2 account for a portion of healthcare costs that are non-modifiable, and that health status is a less influential driver than one might expect.

We move to the final driver of healthcare costs, which is both modifiable and significant, but unfortunately too often overlooked: business practices. What do we mean? Business practices are the entire set of employee policies and practices captured in everyone’s workplace environment and employment contract—such as how compensation works, how health benefits are structured, how time off is allotted, how employees are trained and managed, etc. In combination, these practices have amazing influence over employee behavior. (This topic has been touched in previous blogs and will not be surprising to regular readers.) However, the magnitude of business practices’ influence on employee behavior catches most people off-guard.

The bottom line: business practices can have three times the impact on cost as health status. First, some history. If business practices matter so much, why haven’t we heard about them before?

• Actually, you probably have, just not in one place. Most of these effects are well-documented.


• Actuaries have decades of evidence showing the impact of deductibles and copayments; however, it is usually seen as differences in cost-sharing arrangements rather than behavioral incentives (1, 2).


• Management and compensation journals highlight many ways that rewards impact worker performance and withdrawal (3, 4).


• Risk management professionals understand that worker satisfaction influences the rate of accident and injury (5).


• Disability carriers clearly understand the relationship between insurance policy design and the rate of claim submission (6).


• Experts in talent development know what sorts of advancement opportunities help an organization keep its top workers.


• Health economists have documented the use-it-or-lose it phenomenon of both sick leave and annual deductibles (7, 8).

So, the evidence is everywhere, but each piece of it typically remains stuck in separate fields. And because this information is so seldom captured and integrated from so many different sources, the impact of independent cost drivers has been nearly impossible to measure, until now.

Economics tell us that incentives matter.
Simply put, if we align business practices such that employees can earn more rewards for being more productive, and get extra value by avoiding absences, both are more likely to happen, no matter what the health status of the group. On the contrary, if employees perceive little reward for higher productivity and have to take absence days in order to avoid ‘losing’ them, workers are more likely to be absent, REGARDLESS of their overall health status.

Thus, when we examine the full array of business practices, a combination of aligned compensation, benefits design, training, and management practices can influence healthcare and disability costs by as much as 30% or 40% compared to misaligned business practices. (Remember, improving health status (Part III) by 10% only produces a 10% cost improvement opportunity.)

A typical example is shown in this figure (click to enlarge) where medical and absence costs are separated along the lines of the categories discussed above. This is a hypothetical “organization” with typical business practices we commonly see in large corporations. As expected, there is a significant cost component attributed to Basic Costs and Workforce Demographics (Parts I & II). Also notice that there is potential to reduce costs through a 10% health status improvement (Part III). But of critical importance, our models indicate that the vast majority of their modifiable costs (which account for 39% overall) are attributable to their business practices (28%).

While the effect of business practices may seem large (in some cases up to 40%), recall that we are talking about a combination of many different business practices. In the RAND health insurance experiment, the effect of a larger deductible by itself was a 40% difference in medical costs (1). Here we are talking about policies and incentives governing healthcare coverage, paid time-off, compensation, disability, training, and other things. Given the cumulative influence of all these incentives combined, we should not be surprised that their sum is dramatic.

Which business practices matter most?
The truth is they act in combination because they are interrelated in fundamental ways. The easy answer is that we need to align them all. But which one is MOST important for a given organization depends on what they are already doing right. Compensation design influences benefits use, absences policies influence medical costs, training practices influence turnover, and so on. In other words: cost drivers that are sometimes considered to be unmodifiable (in the sense that they are immutable) are really influenced by the modus operandi (management practices) of the business and therefore are really modifiable.

In separate blogs, we have explained that business practices have measurable impact in several areas, such as:

• PTO plans and buy-back plans (versus strict sick leave) improve attendance.


• Variable pay plans improve retention, absence and benefits use.


• High deductibles combined with fully-funded HSA plans reduce costs and improve health protection.


• Our new models confirm that aligned business practices are predictive not only of benefits cost, but also productivity and turnover. And, from all indications, better aligned business practices also enhance employee engagement and health program participation.

All aspects of human capital management are connected. How you reward, train and manage people has a stronger effect on business performance than you may think. This is no longer simply a health benefits issue, but a critical discovery that points to affordable solutions that have a demonstrable effect on business performance. Further, if a company’s sole strategy for controlling medical and disability costs is focused on health improvement or value-based purchasing strategies, the largest part of the cost-savings opportunity will be missed.

Why this matters: Employers invest billions of dollars in health improvement and health management to try to control costs. Yet many employers overlook an even larger opportunity to reduce benefit costs by aligning incentives with their business practices in ways that do not require additional investments. Ignoring such obvious opportunities leaves huge potential for business performance unrealized.
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References
1. Newhouse JP. Free for All? Lessons from the RAND Health Insurance Experiment. Cambridge, MA.: Harvard University Press, 1993.

2. Manning WG, Newhouse JP, Duan N, Keeler EB, Leibowitz A. Health insurance and the demand for medical care: evidence from a randomized experiment. Am Econ Rev 1987;77:251-77.

3. Lazear, EP. Performance Pay and Productivity. American Economic Review 2000;90(5):1346-61.

4. Trevor CO, Gerhart B, Boudreau JW: Voluntary turnover and job performance: curvilinearity and the moderating influences of salary growth and promotions. J Appl Psychol 1997;82:44-61.

5. Butler RJ, Johnson WG, Côté P. It pays to be nice: employer-worker relationships and the management of back pain claims. Journal of Occupational & Environmental Medicine 2007;49(2):214-25.

6. Health as Human Capital Foundation. Money matters in decisions about disability. September 27, 2005. Accessed October 11, 2009.

7. Keeler, EB, Rolph, JE. The demand for episodes of treatment in the health insurance experiment. Health Econ 1988;7(4): 337-67.

8. Ehrenberg RG, Ehrenberg RA, Rees DI, Ehrenberg EL. School district leave policies, teacher absenteeism, and student achievement. J Human Resources 1991;26(1):72-105.

How much does health drive healthcare costs anyway? Entry 20 - 2009

When medical and disability costs are high, conventional wisdom assumes there must be more illness driving up costs, right? But how much of total cost can we actually attribute to health status versus other things?

Four Parts
There are actually four driving components of health and absence cost, the first three of which we’ll cover here, and the fourth in the next blog. To give away just a little of the secret in advance, it may surprise some readers to learn that health status is not as powerful a predictor of cost as one might expect.

Believe it or not, our research on nearly 2 million employees and their families across the US finds that a surprisingly small amount of the variation in healthcare costs can be attributed to health status.

We’ve studied how each of four components independently influences cost when all the others are held constant. (We won’t get technical about this other than to say that our analysis included medical and disability data from tens-to-hundreds of thousands of people, running two-part regression models to estimate independent effects.)

The first two components involve “non-modifiable” costs that cannot easily be influenced or changed, while the second two involve costs we consider to be “modifiable.”

Part I: Basic needs and bad luck
Could healthcare and disability costs actually go to zero if we had a very young, generally healthy population? Clearly not. To explore the possibility though, we constructed a model that would approximate such a population. We selected characteristics that correlate with lower costs. We took a young (late 20s), mostly male, single (e.g., not having children), highly-educated, highly-paid workforce, in a region known for low-cost care, with all benefits policies and business practices aligned for optimal use of benefits.

Can you guess what it would cost to cover the healthcare spending of this virtually-risk free group? Our data says it is somewhere near $1,300 on average per year. Some costs would be associated with basic needs, and some would be the result of misfortune due to genetics or accidents. As you might expect, the majority in this population would have very small expenditures, with a few high outliers.

(My colleagues and I debated about this number because it is virtually impossible to have a population this young, highly-paid, in a specific region, and with a specific gender and marital-status profile. However, this was never intended to be an achievable situation, just the lowest imaginable.) So, the lowest imaginable total for Part I: $1,300 / adult person / year.

Part II: Demographics and labor market
Face it, age matters. Our bodies wear out. Other factors such as where we live and the type of work we do matter, too.

To explain how demographics and labor market affect cost, figure on AVERAGE:

• Older workers spend more on health than younger workers;
• Women cost more than men (at least up to a certain age);
• Lower education and lower salary correlates with higher medical and absence costs; and
  
• Workers in some regions spend more (North East) than others (Rocky Mountain).

Companies naturally hire a workforce with the skills and characteristics needed for the services and products they produce. One company might attract an older, mostly female, less-educated workforce who will earn minimum wage in Minnesota. Another might attract highly-skilled, younger, male engineers in Boston. Because most companies tend to have a consistent labor market to choose from, and because the demographics of those hired rarely involve drastic changes in type of workers, level of pay, or location, we consider the “Demographics and Labor Market” part of cost to be largely non-modifiable. *

To illustrate the impact of this component, a company in New England with an average employee age of 40 and hourly workers making $40,000 per year would be expected (OTHER COMPONENTS KEPT EQUAL) to add another $1,500-$1,800 per employee above the basic ($1,300) amount from Part I. The same group aged 50 or 60 years would add almost $2,200 or over $3,400 per employee, respectively. (click on the table to enlarge)

Non-modifiable total for Parts I & II: These two components can vary, as we see, from under $1,300 (in our “lowest cost” situation) to $4,700 in the extreme. For the companies we work with, the non-modifiable portion often sits in the $2,500 to $3,500 range. However, total costs for these companies often range from under $4,000 to almost $6,000 per person per year! So if basic costs, bad luck, labor pool and demographics only account for about 60%, where does the rest of the cost come from?

Now for the modifiable parts. By modifiable, we mean something that can be altered by the individual, and/or influenced by the employer. Above, we categorized demographics as non-modifiable because you cannot change them unless you change who you hire. Modifiable factors are those you can theoretically change in the people you already have.

Part III: Health status

When health declines, costs go up. Naturally, we put this component in the ‘modifiable’ section of cost, because each of us can decide to what degree we avoid risk and protect our health.

Once again, to isolate the influence of health, we hold constant the basic needs, bad luck, demographics and labor pool factors described above. In the end, our research finds that a 10% improvement in health will influence and reduce costs by about the same amount, between 7-11%.

Here is what I mean:

• A 10% decrease in the number of diagnoses people have correlates to a medical and disability cost difference of 11%.
• A 10% decrease in the number of medications people receive results in a medical and absence cost difference of 7%.
• A 10% improvement in self-reported health status (a 10% average group score on a scale from poor to excellent, e.g. from 3.0 to 3.3) correlates with combined medical and disability cost decrease of approximately the same amount, 9%.

For those who want a more technical explanation…basically these analytic models tell us that when health-related metrics indicate that when the same population (same demographics, jobs, work environment, location) is 10% healthier, they will be about 10% less costly. If the population is 20% healthier, we would expect them to be 20% less costly.

So let’s do the math. If a group has non-modifiable costs (from Part I & II) of around $4,500 per employee, their total costs could be = $4,050 if they had 10% better health status than average people of that age/gender/location, etc.

What catches my attention is the magnitude of change in health status required to produce a cost savings. On the one hand, it validates what we all know: if we live healthy lifestyles and avoid many of the preventable illnesses we develop as we age, we will feel better and cost less.

On the other hand, after evaluating the broad range of health programs, disease management, case management, and wellness efforts available to employers across the US, I don’t recall a workplace intervention that produced a full 10% improvement in actual health status across all employees.

My colleagues in the wellness industry will likely object to this number, because published studies have shown larger dollar figures regarding the cost of health risks. We often quote studies saying that a risk factor equates to thousands of dollars. While this is a topic for a different blog, it reminds us to look carefully: have we ever seen a case where every member of the entire workforce successfully eliminated a full risk factor? If we convince only part of the population to accomplish this, the dollar value will be a fraction of the full value.**

So, if improving health status by 10% would reduce costs by about 10%, what else is there?

To isolate the independent effects of the first three parts above, we held everything else constant: not only characteristics of the workers, but also the employee policies and business practices in their place of employment. This set of predictors is usually left out of health-related modeling, but you’ll soon agree, it shouldn’t be.

Which leads us to Part IV.

Part IV: Business Practices

In the next blog, we will cover a critical and often overlooked driver of healthcare and absence costs: business practices. All of the underlying incentives inside an employer culture matter—how benefits are designed, how people are paid, how they are managed—each influences utilization of benefits. More often than not, these factors have a stronger influence on cost than health status.

Why this matters: In some instances, we overestimate the influence of health status on healthcare and absence costs. As a result, companies presume that ever-increased spending on health programs will reduce their overall healthcare costs. Being realistic about what really drives benefits costs will help organizations make investments in their human capital that more effectively produce return-on-investment.

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Notes:

*In this brief discussion we are really only looking at “demand-side” components of cost; we are not going to address how the supply-side (meaning differences across providers) affects costs, although we acknowledge this phenomenon is very real. To some degree this is included in regional differences.

**Certainly, some of the differences in different regions of the country, which we are attributing to demographics here, reflect differences in health habits. We know from national statistics that obesity rates and smoking rates differ in different parts of the country. In this discussion we are taking the point of view that the employer has a specific labor pool to choose from. From here we ask: how would a change in health status in this labor pool affect costs?

What patients should be fighting for: Control of both dollars and decisions. Entry 19 -2009

If those who have the money are the ones with decision-making power, why not let patients have both? As government and insurers debate over who should grant permission to doctors about which treatments and care regimens are acceptable, why not award ultimate control to the person in the best position to decide—i.e., the person receiving the care?

Consider this story:
In a radio interview last month, I heard two doctors (specifically, both called “interventional cardiologists”) debating the merits of their preferred approach to unclogging heart arteries. One followed guidelines based on evidence that when patients are stable, medications are as effective—and often safer in the long term—than placing a stent in the artery. The other has a “bias” toward stents, and places an average of seven a day. He says that when he sees the blood flow increase immediately, he knows it helps the patient immediately. Both doctors insist that money has no influence on how they practice, and if it influences some doctors it only happens at a “subconscious” level.

While it was unsettling to hear two doctors interpret sound research so differently, it was not surprising. The most disturbing aspect of the interview was the part they DID agree about:
THEY choose what the patient needs most; THEY have the freedom to decide what procedure to perform on behalf of their patients; and “THEY just don't want the government or insurers telling them what to do.”

Not once did either doctor mention discussing the options with patients, or mention their patients having any role whatsoever in critical care involving their hearts! There are benefits and risks associated with each option, the personal value of which only a patient can decide.

Debating government (as an insurer) versus insurers (as a governing payment system) misses a critical point.

When doctors OR politicians argue about who will make “health decisions,” they SAY they don’t want government or insurance getting in the way of a decision made by a “patient and his doctor.” Yet, as we know, patients are not included in informed decision-making as often as we’re being led to think.

What doctors are really arguing about is who will govern the purse strings, i.e., who will make “payment decisions.” The party in control of the dollars will inevitably decide which medical practices get reimbursed, and for what price. And, the procedure that gets paid through reimbursements is the procedure most doctors will choose.

While each side argues which payment system will do better job of protecting the all-important physician-patient relationship, one can only wonder whether the typical relationship is one that deserves protecting. Despite the terminology, neither the private, nor the public option mentions a guarantee of patient inclusion, beyond signing an “informed consent,” which is really just a permission slip approving what has already been decided.

Sadly, one of the only patient-decision-making provisions (optional counseling about end-of-life choices) mentioned by either side has now been removed after it was misconstrued by opponents and in the media.

What should patients be fighting for? Control of both dollars and decisions.
What if we did create health accounts and send patients dollars or vouchers to pay for treatments?

I know—I can already anticipate the objections about patients not being capable:
1) Patients don’t know enough to make good decisions.
2) Patients will be misled by providers when they are vulnerable.

But let’s ask ourselves, are patients better off now in a system where they have almost no control over payments and leave decisions up to others? Are patients given the right amount of information now during times when they are vulnerable?

True reform would come from the bottom up, rather than swapping out big payers.
When we spend our own money, we tend to become more informed and make choices more carefully. In a patient-controlled system, independent, trusted services will evolve (like consumer reports) that help people navigate the system.

In a market where consumers have dollars, we would likely see a revolution of lower-cost health treatments taking the place of today’s outrageously-priced technologies. When the consumer (spending dollars) is choosing rather than a doctor (earning dollars), the incentives would create an opening for brand new approaches to care. Today, doctors protect their right to do high-cost interventions (like stents) instead of prescribing lower-cost medications…while someone else pays.

Despite the insistence of the doctors in the interview above, never doubt that medicine is a business, regardless of who pays. Years ago, the director of a prominent cardiology group approached me about trying to justify higher fees for a safer, lower-cost treatment option.

Asking for anonymity, he confessed that while his team was aware that the new option was probably less traumatic for patients, they decided to continue the traditional approach because revenues were so much higher. He insisted that if only employers would pay additional money for the more efficient option, patients could get better care. Sadly for him, I could think of no method for justifying an over-priced fee for a better option that should be saving everyone money.*

In that unfortunate case, patients were not paying and were not asking about less expensive treatments. And the treatment center didn’t advertise the cheaper alternative. If patients were interested in great outcomes for less money, smart developers and providers would fill the void.

Why this matters: Patients can and should be active decision makers in their healthcare treatments. Any third-party payer, regardless of who it is, retains control by virtue of approving or denying payment for care. If we really want something different, we can make that happen. Placing financial control in the hands of patients would change the dynamic of the doctor-patient relationship in ways that would encourage collaboration, efficiency and accountability.

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*Note: This example certainly highlights the type of provider who does not promote active decision making by patients, and is not intended to represent all providers. We acknowledge and commend the many providers who do facilitate shared decision making, yet believe this practice is not nearly as common as it should be.

References

1. Joffe-Walt C. Doctors Disagree About Effectiveness, Cost of Stents. August 26, 2009; Accessed September 13, 2009.

The day an entire work force got sicker – or did they? Entry 18 – 2009

Imagine being a benefits manager for a large corporation boasting three straight years of flat medical and absence costs in 2005, 2006 and 2007 (1). Like many benefits managers, you might be proud and vocal about the many programs you’ve purchased to encourage health and disease management. We have all seen such flat trends attributed to health interventions provided by employers. This example was no different.

If health programs or active management of disease could be credited for a three-year flat trend, how does one explain what then happened to the same company in the following 15 months?

Did everyone suddenly become ill in the fall of 2007? Suddenly, chronic diseases and injuries just appeared?

To confirm, detailed analysis of health claims shows that virtually every category of illness became more prevalent and more expensive. So, if you believe the only driver of medical costs is the number and severity of medical conditions, you have to conclude that poor health made things worse. But if so, what happened to all of the programs (which were still in place, by the way) we credited for the three-year flat trend?

Of course there are other reasons…
More frequent and more expensive medical claims do not prove more disease or increased severity. This is about more care-seeking, not more health problems. It will not surprise most readers to learn that several non-health-related events happened at this company right at the point where the cost trend changed: business revenues started to fall in mid 2007, which brought about a hiring freeze and some lay-offs. Bonuses fell, salaries did not rise as quickly as before, and the company announced a restructuring process.

No, people did not all-of-a-sudden have new diseases, but there were definite changes in their reasons for using benefits. When business events make work more tenuous and stressful, we often see workers:

• Getting discretionary procedures done before possibly losing health insurance;


• Using time off to go job hunting;


• Having less enthusiasm for attending work in general;


• Spending down any unused Flex Spending and Health Reimbursement funds;


• Seeking additional medical services for stress-related symptoms; and


• Drastically increasing benefit use prior to termination.

All of these factors, and perhaps others, probably contributed to the significant cost increase in this case. And, while it is certainly true that increased stress at work is likely to cause workers to feel lousy, that is different than developing new chronic illnesses or injuries.

Why do we cling to the ‘health only’ explanation?
Although it surprises me, many presenters at corporate health conferences still perpetuate the idea that health benefits expenditures are purely a function of disease. They insist that if a company’s expenditures are high, it is completely due to a sicker workforce (that needs more intervention). And similarly, they insist that a lower-than-expected trend is a reflection of better health. That is only one factor. As we see here, that explanation can backfire when more complete information is available.

In tough economic times, it is even more important to align incentives with business success. Never forget that incentives matter; meaning that if employees can get value only from USING benefits, this problem will only further amplify when business is down. Higher deductibles, the presence of health savings accounts, cash-back for unused time off, lower pay during short-term disability and higher bonuses all give employees reasons to stay healthy and minimize costs no matter what the economic climate. These incentives counteract the natural tendency to use-before-you-lose, and they position judicious consumption in everyone’s best interest. The current recession has strained nearly every company in the U.S. The trend shown in these graphs is not unusual; but the more misaligned a company’s incentives, the greater the predictable increase in benefits consumption.

Think of it this way: when employment becomes less certain, future benefits are threatened, and there is no inherent value in NOT using benefits—people will naturally respond in their own best interest with higher consumption. So, have you checked your trend lately? Maybe it’s time to realign.

Why this matters: Health-benefit costs reflect more than health. Given the economic climate, there has never been a better time to check incentive alignment. If they have something to gain, employees will be better stewards of the resources at their disposal. ____________________________________________________________

Notes

1. Although this is a real trend, we altered the actual values a little bit to protect the company’s identity. Several companies we work with have had similar experiences during the recent economic downturn, so think of it as a composite of multiple organizations.