HFMA VIEWS

Fred D. Campobasso
President, AMDC Solutions in Healthcare Real Estate
 
A common misconception, companies often believe that the path to success starts with a great idea and a healthy amount of planning.
 
At last year’s Health Forum/AHA Leadership Summit, I listened to keynote speaker Jim Collins, the author of Good to Great: Why Some Companies Make the Leap…And Others Don’t. He’s spent the last decade researching the secrets behind the success of great companies. As many of you know, he believes that, despite popular opinion, even the best idea wouldn’t save you if you don’t have the right team. Collins attributes long-term success to two things: having the “right people on the bus before you figure out where to drive it” and maintaining inspired standards when selecting those people. Never settle for second best and work hard to assemble a team of self-motivated and self-disciplined people. He’s a strong advocate for changing whatever it takes until you have the right team in place before concentrating on the plan. If you are currently in the process of starting a new project—or just contemplating one—this might come as a harsh reality check.
 
So, what can you do to salvage a project that’s heading down the wrong path? As Jim Collins would tell you, take a good, long look at the people on your bus. Are they the right people? Are they the right people in the wrong seat? Bottom line, if they’re not lining up to your expectations, they either need to be put in the right seat or they need to be replaced. At the end of the day, the most important thing is to make the project successful.
 
Every organization has its ups and downs. I’ve been in this business for over twenty years and I can tell you firsthand that it’s not easy to get and keep great people on your bus. But once you assemble that dream team, your determination and perseverance will pay off.

Scott MacStravic, PhD

Neither the concept of “return on customer” nor “return on employee” seem to have been discussed very much relative to healthcare organizations. It is clear, however, that many if not most HCOs have at least considered the advantages, even necessity of going for more profitable customers, as covering the costs of un- and under-insured patients becomes increasingly difficult under the miserly payments available from commercial and government insurance programs.

But return on employee is an uncommon term even in business at large, much less health care. A Google search turned up only one example of this specific phrase and initials ROE being used. And it dealt with “return” only in the narrow context of revenue per employee, rather than on elements of employee contributions over which employees truly exert control. On the other hand, the phrase “employee value” does yield a large number of references, so at least the idea is not unknown.

ROE is simply a financial expression of employee value, based on either the overall investment that employers make in hiring, managing, developing, retaining, and rewarding employees or a specific investment intended to increase the value of employees’ contribution to the performance of the organization. At the overall level, there have been some interesting findings with respect to how much employees are worth, compared to how much they cost organizations.

For example, one analyst suggested that on average, roughly 10% of employees are negative contributors, with another 15% marginal. Half of employees are at least positive, though hardly outstanding contributors, while 15% are high performers and 19% real “stars”. [J. Durel “Measuring the Employee’s Value to Your Organization” Qm2.org (undated, downloaded Jan 2, 2007)] Most employers, while claiming that their employees are their most valuable asset do little or nothing to measure just how valuable they are, perhaps for fear that employees will start thinking in the same terms and feel they are underpaid. [R. Aldag & W. Reschke “Employee Value Added: Measuring Discretionary Effort and Its Value to the Organization” Center For Organizational Effectiveness, Inc. 1997]
On the other hand, at least one analyst has calculated specific dollar value for employees in the high-tech, high-knowledge pharmaceutical industry. [P. Strassmann “How Much Is an Employee Worth?” Microsoft.com Jan 14, 2006] The analysis used is based on comparing the “Knowledge Value” compared to “Financial Value” of firms, and comparing this to the total compensation given to employees, adjusted for the capital costs of the firms, since their facility and equipment capital investments contribute significantly to output quantity quality, in addition to human capital investments.

The analysis examined seven different pharmaceutical firms, and calculated the “net worth” or dollar difference between the value firms gained from their employees and compensation paid. This represents the ROI amount or “net profit” per employee, in terms of the firm’s investment therein. The amounts for the seven firms ranged from a high of $538,000 per employee at GlaxoSmithKline to a low of $2,656 at Novartis, with Wyeth $412,000, Johnson & Johnson $182,000, Atrazeneca $76,000, Roche $44,000, and Novo Nordisk $40,000. The analysis concluded that firms with low net worth per employee signal a fundamental weakness, while those with high net worth may be at risk for employee raiding by their rivals.

The ROI ratios for these seven firms, a ratio often used to judge the relative effectiveness of investment management, ranged from a high of $7.78:1 for Wyeth to a low of $1.03:1 for Novartis, with the mean ratio $3.34:1 for all seven, though only three of them were as great as$2:1, with the average being skewed by two firms at $7.78 and $6.96. In any case, these ratios demonstrate rather extreme variation in ROE, however it is calculated.

When examining the importance and value of improving employee health, using only productivity as a measure of value, another analyst used a ratio of $2.00:1 to show how a modest investment in improving or protecting employee health needs only a tiny improvement in productivity, only 0.33% in the illustration used, to make up for the investment and achieve at least a breakeven return. [M. O’Donnell “Health and Productivity Management” American Journal of Health Promotion 14:4 Mar/Apr 2000 215-217]

The Dow Chemical Co. has calculated that it needs only an average productivity improvement of 0.17%, only half what the above example calculated, to break even on its wellness investment, not counting the other predictable returns through reduced sickness care, disability and workers compensation costs. [R. Goetzel, et al. “Estimating the Return-on-Investment from Changes in Health Risks on the Dow Chemical Company’s Health Care Costs” JOEM 47:8 Aug 2005 759-768]

If HCOs are to truly operate on the principle that their employees are their most valuable asset, they must at least attempt to determine just how valuable they are. Moreover, it makes sense to calculate the different value of different employees in order to focus attention and investment where it will do the most good, in employee health, development, and retention. One employer achieved an immediate 44% improvement in ROE by switching to a pay-for-performance compensation model from an hourly wage one. Another gained a 35% increase in productivity, along with a dramatic reduction in employee stress and turnover, by adopting a “work anytime anywhere” policy.

While HCOs understandably have focused much of their attention on information technology investments, along with the capital investments required to keep up with state-of-the-art quality of care, they should not overlook the importance and value of investing in employees. It is likely that their overall financial and balanced scorecard performance can be improved significantly by working explicitly to improve their ROE ratios and amounts, where there is likely to be great room for improvement.

Editor's note: This in Scott MacStravic's 500th published piece. Congratulations, Scott! The healthcare field is better for your contributions.

Richard L. Clarke, DHA, FHFMA
President and CEO, HFMA

President Bush’s healthcare plan deals with short-term issues, but does not address the broader goal of covering the uninsured. Bush’s plan recognizes the important inequities caused by the non-deductibility of health insurance premiums purchased by individuals. This part of the tax code is illogical and unfair to those who must purchase health insurance on their own, when it is not provided to them. By recommending that the value of employer-provided health insurance premiums be taxable income, Bush’s plan may cause individuals who receive such coverage to recognize better the value and cost of this benefit. These short-term features may be positive as long as they are coupled with other changes. 

One change is to regulate better the individual insurance marketplace to ensure rationality and fairness.  Currently, the individual insurance policies do not have the same insurability or transportability features that group policies have. As such, they are more risky and less desirable than group policies. The second change is to ensure that employer provider health insurance is not damaged by these changes. Incentives and/or penalties for employers to continue to provide coverage is a must.

A long-term fix to the problems of providing coverage to the uninsured must begin with comprehensive proposals that address the root problem and gain the acceptance of all major stakeholders. Fixing the tax code in the short term may be a step toward better rationality, but it should not distract us from the longer term issue of providing coverage for the uninsured.

The Bush proposal for a standard tax deduction for health insurance is now public, and more responses are rolling in. Click here for an overview of the proposal. Click here for White House refutation of statements critical of the proposal. Follow are excerpts from some reactions noted this morning:

“We strongly support a level playing field in which individuals can purchase health care coverage with pre-tax dollars. Currently the tax code fails to assist individuals unless they spend in excess of 7.5 percent of their adjusted gross income on health care. Enacting common-sense tax incentives for individuals will go a long way toward helping millions secure and maintain the coverage they need.

“This plan also recognizes that states are an essential partner in any program to cover the uninsured. Federal incentives that provide a helping hand to states that tackle this problem are a great way to spur progress. This effort can also encourage states to re-examine costly mandates that limit health plans' ability to offer more affordable coverage options to consumers and employers."

--Karen Ignagni, President and CEO, AHIP

“...[O]ur laws shouldn’t prevent working Americans from obtaining affordable quality health coverage. I have always been supportive of plans that provide workers access to affordable health care and more ownership over their medical decisions.  The proposal unveiled by the President tonight for increasing the number of Americans with health insurance sounds promising, and it deserves a full and fair hearing in Congress."

--House Republican Leader John Boehner (R-Ohio)

"We applaud the President for addressing America’s healthcare challenges in his State of the Union Address, specifically for noting the importance of the doctor/patient relationship and acknowledging that healthcare decisions should be made by them and not by government or insurance companies.  However, it was disappointing that his approach focused entirely on tax code changes he feels will give more people access to health insurance. While tax changes may shift costs of care, they still accept the current model of care delivery--a fundamental focus on treating symptomatic illness. All research indicates that intervention at the point of diagnosis represents the highest cost of care and the greater potential for suboptimal outcomes. We believe there’s a bolder vision for America, namely a far great emphasis on prevention as the solution to our healthcare problems--putting in place programs, protocols and procedures that detect and treat health risks early, preventing them from becoming life-threatening diseases."

--Brian Baum, President and COO, U.S. Preventive Medicine

"The innovative plan is a major step toward improving the efficiency of the market for health insurance. By severing the link between work and insurance, it would offer everyone the same tax incentives to obtain insurance coverage and limit spending on health care. Whether it would succeed in meeting its objectives in a fair way is less clear.

"The new tax incentives will help some individuals to gain coverage. But they could also lead employers, particularly those in small firms, to discontinue health plans for their workers, some of whom would end up without insurance. Furthermore, by relying on tax deductions, the plan would continue to provide the largest benefits to high-income taxpayers and offer little or no financial incentive for low-income people who most need help paying for insurance."

--Leonard E. Burman, Jason Furman, Roberton Williams
Urban Institute

Following are more reactions to proposed tax-code changes related to health insurance expected to be part of tomorrow's State of the Union Address. (Click here for reactions over the weekend.)

"This is literally taking money away from the poor.... You are taking money away from children covered by Medicaid, and you could throw the safety institutions we are counting on being there for everybody into financial jeopardy."

--Peters Willson, vice president for public policy with the National Assn. of Children's Hospitals, quoted in the Los Angeles Times

"The President's so-called health care proposal won't help the uninsured, most of whom have limited incomes and are already in low tax brackets.... But it will hurt middle-income Americans, whose employers will shift even more cost and risk to their employees... As health care costs continue to rise, more and more people will be deemed to have ‘gold-plated’ coverage, even as insurance companies pay a smaller share of health care costs. The result? Higher taxes, higher premiums, and higher costs for working families. "

--Rep. Pete Stark, D-Calif.

"America's hospitals are pleased that President Bush has focused attention on uninsured people. But the President's proposals are unworkable for many and not focused on those most in need. The tax proposal would have the effect of driving people to the small group insurance market--a market that has proven unstable. For many people, even with a tax break, coverage remains unaffordable and out of reach. Additionally, by reducing funding, the President's proposal pulls the rug out from under safety net hospitals that care for some of our nation's most vulnerable people."

--Rich Umbdenstock. President, American Hospital Association

In his Saturday radio address, President Bush offered a glimpse of a healthcare proposal forthcoming in Tuesday's State of the Union address. The prosal calls for tax breaks for Americans without health insurance or whose employers provide less than a specified level of health insurance, as well as tax increases for those whose employer-paid health insurance coverage is above a specified amount. The New York Times and Reuters provide more details.

Following are some early reactions:

"Most of the uninsured are people who are working and they've got a little bit too high of income to qualify for Medicaid or other government programs. If they buy health insurance they have to pay for it entirely out of their own pocket....This would be a significant amount of new help for them."
--Mark McClellan, former CMS Administrator, quoted in an Associated Press story

“If the President really wants to take the lead on skyrocketing health care costs and securing our nation’s energy future, he must put forth comprehensive strategies that truly help consumers....Tax deductions do little or nothing for those people who are uninsured and devastated by high health care costs....When an individual family policy for decent health coverage costs about $11,000 a year, tax credits of $1,000 to $3,000 to buy insurance are almost meaningless.”
--Bill Vaughan, Senior Policy Analyst, Consumers Union

“It’s a bad policy.... We are trying to bring tax relief to the middle class. The president is trying to increase their tax liability. This proposal is inconsistent with what the majority is seeking in the House and the Senate.”
--Rep. Charles Rangel (D-N.Y.), quoted in The New York Times

Scott MacStravic, PhD

Like all employers, healthcare organizations -- including hospitals and large medical groups, as well as systems that combine both – can gain from improving their employee health. A survey by the Integrated Benefits Institute has reported the attitudes of 343 CFOs in varied industries on this subject. It noted that the employee health objectives CFOs have for the next two years include:
Controlling sickness insurance costs (most common – over 80% mentioned)

• Managing all health-related costs (63%)
• Improving the health or their workforce (50%)
• Sharing more costs with employees (40%)
• Improving benefits for employees already covered (25%)
• Quantifying health impact on productivity (25%)
• Expanding benefits to more employees (10%)

[“Linking CFOs to Health and Productivity” Integrated Benefits Institute 2006 (www.ibiweb.org)]

This report also indicated that CFOs are relatively under-informed with respect to the health-productivity connection, with nearly half never having received reports on worker absences, and less than 20% learning of presenteeism levels. Only 22% ever get reports on financial impacts of health-related absences, and only 8% get such reports on presenteeism. They seem to recognize that employee health affects bottom-line business performance, but lack the information that they would need to even begin to plan and manage health-related productivity, much less other financial performance effects, as well.

The respondents to the survey were generally fairly well aware of the many areas that employee health absence and productivity impairment when at work combine to affect, from overtime pay and temporary replacement costs. And 60% identified lost revenue and opportunity costs in addition to these. But almost 40% reported that their organizations have left work undone and deadlines missed, despite the probability that these would produce revenue losses. And over 60% cite rising employee healthcare costs as near or at the top of their concerns, while nearly half said that absenteeism and presenteeism are having a meaningful negative effect on their overall performance.

It is likely to be the breadth of the impact of employee health that is escaping most CFOs, if not in simple awareness thereof, then certainly in their ability to measure and manage this impact. The literature on employee health management has two major flaws in this regard. The first is that it has far more examples of scientifically sound studies that describe the negative effects and costs of employee “unhealth” than those that describe the savings achieved through employee health improvement efforts.

And the second is that the vast majority of studies reporting savings achieved have looked at only one or a few performance impacts, since this makes the study easier to do and the report easier to write, as contrasted to comprehensive reports across the full range of savings and performance impacts. This tendency may be exacerbated by the fact that the “academics” who write the reports can get a large number of articles added to their resume if they focus on one impact at a time, rather than only one if they include all impacts in one article.

I have found literally dozens of employee health impacts on balanced scorecard performance dimensions mentioned in reports, though the majority of these were more on the anecdotal than the scientifically rigorous side, and almost all focused on one or at most a handful of effects, rather than the full range of possible effects. Those about US companies tend to focus on direct and easily measured results related to sickness care, workers compensation, STD and LTD costs – while those from other countries focus much more on productivity, staff turnover, and customer/business revenue effects.

In any case, there are both vastly more dimensions of value that are being positively affected by employee health initiatives than are being measured, and more opportunities for affecting them than are being exploited. The Integrated Benefits Institute, for example, offers to create a “Health and Productivity Snapshot”, based on data submitted by organizations, together with the Harvard Medical School’s “Health & Work Productivity Questionnaire. This snapshot will estimate and predict at least as far as WC, S/LTD, Family Medical Leave, and productivity effects of employee health for an individual HCO, with benchmark comparisons to other organizations. Information on this service may be found at its website www.ibiweb.org.

Many hospitals and other HCOs have been invested in employee health for as much as decades, though none that I know of has approached a comprehensive view of either the health dimensions that might be addressed or the performance effects that can be achieved. But many others have little or no investments in employee health beyond annual flu shots and workplace safety efforts. Given the widespread employee shortages in many professional categories, and the ever-present need to control costs, to say nothing of the fact that health is their business, HCOs should probably be doing a lot more in employee health than almost every other industry, not considerably less.

“No margin, no mission.” This quote, attributed to the late Sister Irene Kraus, says it all. That is, the mission of providing safe, high-quality care that meets community needs carries with it specific resource demands that can only be met through maintaining an appropriate margin. For board members of a healthcare provider organization, no responsibility is more important than establishing and monitoring the balance of mission and margin. Board members must understand the financial implications of mission, ensure that the organization’s financial position supports the mission, and monitor both mission and margin using key performance indicators.

This paragraph is the opening of an article entitled "A Board's Eye View of Mission and Margin" that HFMA's President and CEO Richard L. Clarke, DHA, FHFMA, recently published  in an e-briefing from The Governance Institute. The article outlines a framework for thinking about how mission pertains to margin, discusses how to set a budget for community benefit, and suggests indicators related to mission (including indicators of quality and culture) and margin that a board can monitor.

The article's call to action concludes with this assertion:

Hospital leaders must recapture the trust that has been lost and must work every day to maintain that trust. For hospital boards, the most concrete actions toward that goal are establishing a clear set of mission-related goals, quantifying the financial resources necessary to meet those goals, and monitoring performance related to both mission and margin. This careful oversight will maintain the balance of mission and margin, and will make sure hospitals earn the community trust they deserve.

Scott MacStravic, PhD

I still recall the time a few decades ago when organizations devoted to “hospitals” changed their names to “healthcare”, in order to indicate their broadened view of the business they were in. Graduate programs in hospital administration, publications such as “Modern Hospital”, and even hospitals, themselves, adopted healthcare instead. By making the two words involved into one, they enabled retaining the same initials, though, as is true of so many things, agreement has not been reached about whether health care is one word or two, should be hyphenated, or how it should properly be spelled.

The role of a hospital has changed over the centuries, but it has generally been understood to be a place for sick people – to rest and be tended originally, then more to be cured or at least afforded all available opportunities to return to normal in more recent times. Hospitals have actually been engaged in health care rather than sickness care in only the limited community benefit screenings and immunizations they have offered as parts of their missions. Some have also invested in proactive health efforts to keep frail elderly people from needing sickness care, often because they represent unprofitable patients when they need such care, because they require much more care for a longer time than case-based payment covers.

Fortunately, the third party payers that deliver the vast majority of the revenue that hospitals and other “healthcare” organizations depend on for their survival, have always paid fairly well for sickness care. Ever since the depression and WWII fostered medical care insurance and led it to become the principal source of healthcare revenue, employers, insurers, and government agencies have paid -- if grudgingly, miserly, slowly, and selectively – for the sickness care delivered by HCOs. They have, if anything, been even more parsimonious when it comes to real health care, reinforcing the focus of HCOs on sickness care.

But there are signs that this may be changing. Employers have invested in “worksite wellness” and “health promotion” for decades, finding that it reduces sickness care and even workers compensation and disability costs. Insurers, after ignoring the implications of the “Health Maintenance Organization” label for decades, have gradually invested in proactive health, first in disease management, and more recently in disease risk conditions and behaviors, in order to reduce their sickness care obligations. And even governments have belatedly joined the ranks, primarily in disease management, but also in risk conditions and behaviors to a limited degree.

A recent article has described a previous employer strategy that is apparently being resurrected – “eliminating the middlemen”. The idea of direct contracting with HCOs and physicians has been around for some time, and lost favor after a brief popularity, but is coming back. Employers are desperate enough in their quest for sickness care and labor cost control to try almost anything, and larger employers are trying again, by contracting directly with providers for services, and getting away from pharmacy benefit management organizations that tend to promote their own rather than their clients’ interests.

What is different about this renaissance of direct contracting is that it reflects employers’ interests in promoting their employees’ health, not merely the traditional benefit of protecting them from the burdens of sickness care costs. Their pharmacy benefit management efforts include special handling of drugs that are essential and effective in managing chronic diseases -- to reduce crises, complications, and worsening thereof – and in managing risk conditions – to keep them from becoming acute or chronic diseases. Typically this means eliminating or at least dramatically reducing co-payments or co-insurance on such drugs so that employees and their dependents have one less barrier to adhering to disease/risk management regimens.

Employers who contract directly with providers usually include a significant amount of real health care along with sickness care in their arrangements. Perdue Farms, one of the examples of the new direct contracting employers, includes onsite medical care, with an emphasis on keeping employees well, not merely saving time and costs on sickness care. As usually the major employer in the 15 rural communities where it has plant locations, it has the market clout to greatly influence how local hospitals and physicians operate.

Employers have far greater motivation for “buying health” than do insurers or governments, since they can gain vastly greater financial benefits from doing so. Where insurers and governments can only benefit from reduced sickness care costs, employers can benefit from both cost savings and revenue enhancements related to improvements in employee health, morale, productivity, commitment, tenure, and quality of performance.
And these possible benefits are by no means theoretical. While employers in the US have primarily focused on the more easily measurable direct cost savings in medical/hospital care, workers compensation and short/long-term disability insurance or direct costs, some here, as well as many more in Europe have reported savings in reduces absences, increased productivity while at work (“presenteeism”), fewer errors, lower turnover, and similar costs that typically represent multiples of the direct costs most US employers focus on.

And at least a few have discovered and given their employee health investments at least partial credit for improved customer service, retention and loyalty, with the market share and revenue benefits thereof. And a few have extended their view of employee health effects to increases in new business and new customers, higher profits and increased growth over time. While putting explicit, precise and accurate figures on these highly indirect benefits is difficult indeed, such financial performance improvements are generally welcomed as “frosting on the cake” after other benefits have been determined.

If more employers begin to buy health, shifting more of their employee health investments to efforts aimed at reducing the incidence and prevalence of disease and injury, rather than paying for the treatment thereof, it could mean major impact on HCOs and physicians. It could create a new era of importance and compensation for primary physicians and specialists who focus on proactively managing chronic diseases rather than reactively treating them, while creating a dramatic decline in the fortunes of specialists who depend on sickness care “procedures” which would be less often demanded among healthier and better managed patients.

And it could have the same impact on hospitals and other HCOs that depend mainly if not totally on sickness care revenues. The “new consumerism” is already supposed to make consumers both more prudent purchasers of sickness care and more careful managers of their own health, since they will be protecting their own money, rather than spending their employer entitlements. But a “new employerism”, where their focus is on promoting and enabling significant improvements in employee and dependent health could be even more devastating to the fortunes of sickness care providers, while that much more benevolent toward true health care providers.

And as employers lead the way, health insurers are sure to follow, increasing their own investments in proactive health efforts that both improve employee health and reduce sickness care costs. This will be increasingly essential to their ability to retain employer clients and keep them from eliminating insurers as mere middlemen. Most employers do not wish to have the responsibility for managing their employees’ health. It can be onerous and expensive for them, plus introduce all kinds of employee information confidentiality and trust issues.

Southern California Edison, for example, tried direct contracting in the early 1990s, and found that it had decreased its sickness care cost burden by 20%, not even counting other direct and indirect cost savings. But to achieve this benefit, it had to create and maintain a 300-person department, with all its labor costs and management oversight, and this was hardly its core competence or core business. So it gave up the ghost in 1995, and returned to the more traditional role of health insurance customer.

Whether governments will follow is open to question. Current proactive programs, principally confined to disease management and short-term sickness care cost reduction, have typically been found to be, at best, a “mixed bag” in terms of net cost savings. And since this is the only area that governments care about, compared to the vastly greater savings and economic benefit that employers gain, this may keep governments with only a toe in the water. But if ever politicians look further into the future, even they are likely to realize that reducing the incidence and prevalence of disease and injury, if cost-effectively done, is a far better approach to reducing future crises in Medicare and Medicaid than any other option under consideration.

As employers generally begin to appreciate and achieve the kinds of total economic impact on overall labor costs and customer revenue that is possible and has been found through improving employee health, many more are sure to begin buying health vs. limiting themselves to sickness care. And when that happens, so-called “healthcare” providers will find a significantly, if not dramatically transformed market for health services, which they can either be prepared to meet or be run over by.

[Note: the article mentioned above, and the source of both the Perdue Farms and Southern California Edison examples, is P. Wassel, et al. “As Health Middlemen Thrive, Employers Try to Tame Them,” Wall Street Journal Dec 29, 2006 pp. A1, A4]

Scott MacStravic, PhD

There are three main elements and goals in customer relationship management (CRM) – 1) acquiring customers who promise and deliver the optimum benefit for their cost to the firm; 2) retaining them for as long as possible, or at least as long as they continue to deliver at least a decent ROC (“return on customer); and 3) developing them over their “customer lifetime”, so that they increase their benefit to the firm, while not threatening their longevity.

As a career marketer, I have always been interested in all three purposes of CRM and their impacts on ROC. But as a compulsive meddler, I have also been interested in the adaptation of the CRM/ROC concepts and techniques to other sets of “customers” with respect to healthcare organizations. In my last position before retiring, as Vice President for Strategy and Marketing for a multi-hospital system in Denver, I was explicitly responsible, at least for a while, for physician relationships, including a program I inherited from the CEO involving “sales reps” who regularly visited physicians in order to boost their referrals to medical staff physicians, and admissions to our hospitals, and were paid bonuses based on their success.

I was also involved in employee relations, at least to the extent of devising and implementing annual employee surveys, and advising on recruitment and retention issues. But the potential for “Employee Relationship Management” and “Return on Employee”, based on the CRM/ROC counterparts eluded me during my career. Nobody really thought of marketing or marketers as experts in human resources management, though I was involved in employee satisfaction surveys at the last two positions I held, both in multi-hospital systems, for a total of fifteen years.

And the most promising, yet untapped application of these two concepts, at least to my mind, appears to be in employee development, though this obviously includes both recruitment and retention of the best possible performers in the first place. And the two best, yet to be fully exploited opportunities for improving ERM and ROE seem to be in the synergistic areas of employee health management (EHM) and pay for performance (P4P).

EHM offers opportunities for significant, even dramatic reductions in labor costs, which typically represent something like 75% of total operating costs in HCOs, where cost cutting is paramount wherever possible. Hospitals have proven success in reducing their employees sickness care costs (Providence Everett in Washington is an example) and even their WC costs, absences and turnover as well (Fairview Health Services in Minneapolis). Moreover, other employers have reported added performance benefits such as improved customer satisfaction and new customer revenue resulting from healthier employees (Standard Life Healthcare in the UK).

On the other hand, my personal preference is that EHM be labeled “employee” or “personal” health development when it is presented and marketed to employee prospects. This will make clear that EHD is part of the HCO’s overall staff development strategy, and promote EHD’s being integrated with other developmental efforts. Moreover, it is at least likely that employees will prefer being “developed” to being “managed”, as all employees move more toward independence and autonomy in the best performing organizations. And being “developed” offers a far better foundation for improving employee retention than does being “managed”.

P4P fits well with EHM by offering what may be an additional extrinsic reward for employees who become and/or remain healthy and good performers. Many employers pay directly for employees who participate in EHM programs, for example, while since healthier employees perform better, they could also gain P4P bonuses for their better performance. And like EHM, P4P tends to improve employee retention, particularly among good-performers, since poor-performers tend to go where they are not paid on a P4P basis, while good performers tend to remain where they are.

The combination of EHM and P4P offers a new basis for recruiting good performers, since most employee prospects like at least the idea of having an employer concerned about and invested in employee health, while good performers are likely to be attracted to employers who pay them extra for being good performers. It is likely to be equally effective in retaining good employees, since both the experience of gaining health and financial benefit combinations from both, and the anticipation of gaining even more such benefits in future are sure to promote retention of precisely the kinds of employees that HCOs want to retain.

Moreover, both EHM and P4P should at least be instrumental in supporting other HCO efforts to develop employees, via training, education, mentoring, succession planning, work-life balance programs, etc. And like these programs, both have been shown to improve the quality and quantity of employee performance and thereby of the HCO’s performance as well. The CRM/ROC models fit themselves almost perfectly to those HCOs that aspire to be “high-performing” organizations, and to make the most of whatever P4P opportunities they are already taking advantage of or await them. [L. Redd & R. Champion “Fit for the Future: A Road Map to High Performance in US Health Care” Accenture.com 2006]

Richard L. Clarke, DHA, FHFMA
President and CEO, HFMA

“We wanted to shine a bright light on the fact that there essentially is a hidden tax on employers and employees because the government is underpaying for services that are being rendered.”

This quote from David Joyner, Sr. Vice President of Blue Shield of California, summarizes the intent behind a recent study by two insurers to quantify the impact of underpayments from Medicare and state Medicaid programs on commercial insurance premiums ("Confronting the Medicare Cost Shift," MargaretAnn Cross, Managed Care, December 2006).

The study, conducted for Blue Shield and Washington State’s Premera Blue Cross by the actuarial and consulting firm Milliman, quantified the growing effect of this hidden tax on insurance premiums. The study revealed that in California the cost of this tax grew from 3.6 percent of premiums in 2000 to 9.5 percent in 2004. As a result, an additional $951 was added to the cost of a family health premium in 2004.

This hidden tax, the consequence of cost shifting due to underpayments from governmental payers, has existed for years. Almost immediately after both Medicare and Medicaid were enacted in the mid-1960s, policy makers worked to reduce the rate of increase in payments by these programs below the rate of medical inflation. The compounding effect of this policy has been to continually shift the shortfall to private payers. As demonstrated in this most recent study, the impact on private insurance premiums is growing. These results also were demonstrated in a nationwide study conducted by Allen Dobson and others in an article entitled “The Cost-Shift Payment Hydraulic” published in Health Affairs, January/February 2006.
 
The problem with this hidden tax is that it is not well understood by the public, employers, and insurers, and it impacts different providers and different payers based on the provider’s payer mix. That is, a provider with an unusually high level of Medicare and especially Medicaid patients must shift more of its overall cost to private payers. In an era of consumerism and price transparency, this social good (taking care of a greater share of elderly or indigent patients) results in a competitive disadvantage for the hospital or physician group providing the care--I guess no good deed goes unpunished.

Insurers are finally taking notice of this problem and quantifying its impact. Blue Shield’s Joyner said, “Insurers need to do a much better job of highlighting this issue and bringing a greater sense of urgency to it.…Through our silence we are allowing this issue to continue to grow.”

As healthcare financial leaders, we need to highlight this issue with our communities, payers, and employers to ensure that this hidden tax doesn’t remain hidden any longer.

More Information on Cost Shifting

“No Small Change” by Martin J. D’Cruz and Terri L. Welter, hfm magazine, December 2005. Overview of cost- and risk-shifting dynamics among payers, providers, and patients.

“What’s It Worth?” by Ray B. Lefton, hfm magazine, December 2003. Explanation and examples of cost-shifting and the effect on the uninsured.

“The Foundation, History and Implications of the Cost-Shift Hydraulic,” presentation by Allen Dobson et al. at the Federation of American Hospitals’ Future Hospital Care symposium, July 2005.

Kevin C. (Casey) Nolan
Managing Director, Navigant Consulting Inc.

I am not a big fan of horror flicks, but there is one from a number of years ago in which a particular scene has stuck in my mind, and which has become a bit of a cultural icon. In this scene, a cute little blonde girl who is probably 5 or 6 years old is sitting in front of her television screen and as the television screen starts doing strange things, she announces to her family: “They’re back!” By “they,” of course, she means the evil spirits that inhabit and subsequently terrorize the typical suburban family home. I have recently noticed the return of another entity that several years ago ran amok through the healthcare landscape, spreading terror and causing destruction and chaos and resulting in the disappearance of many millions of dollars, and subsequently, numerous healthcare executives who ventured too close to the television! In this case, it is not evil spirits infiltrating through the television (there is enough bad stuff flowing out of those boxes as it is!), but rather the re-emergence of hospital-sponsored physician groups—both primary care and multi-specialty.

As we all recall, about a decade ago, many healthcare organizations embarked on a path to employ physicians in anticipation of the coming tsunami of capitation. When the anticipated tidal wave didn’t materialize, many organizations found themselves saddled with practices for which they overpaid, in which the physicians were not incentivized to be productive, and which the purchasing organizations didn’t possess the expertise to manage effectively. So after a few years of horrific financial losses (there was enough red ink on the balance sheets to cause even Wes Craven to become queasy!), many healthcare systems divested the physician practices. A few hardy (or as most pundits at the time thought—foolhardy) organizations, however, did not. They kept them, worked at changing the compensation model to a productivity-based model, learned how to manage them more effectively, developed the ability to track downstream referrals, and quietly went about their business.

Today, due to a convergence of forces, those organizations that kept their physician enterprises intact find themselves in possession of a tremendous competitive asset, while those that never built physician networks or who dismantled them now find themselves scrambling to create something they thought was dead and buried. This time around, however, the driving forces are not the potential of something (capitation), but rather the actual arrival of several factors, including:

• The changing demographic composition of the medical community (more women and gen Xers) with their desire for better lifestyles, fewer hours, and better benefits (and hence an openness toward and interest in employment).
• The growing realization among physicians that the traditional solo/small group business model is not sustainable from an economic standpoint (their revenues are flat to declining in spite of longer hours, their expenses are escalating, they are faced with spending $30,000+ per physician on EMR, and because they are “onesies” and “twosies,” they find themselves having no clout in managed care rate negotiations—they are “price takers,” not “price makers”).
• The continued consolidation among insurance companies and provider organizations, which further reduces the influence of an individual physician or small group to carry any sway with those increasingly gargantuan organizations.

Given that these three trends are already occurring and not likely to disappear, the reality is that the delivery model of the future is one in which the majority of physicians will be members of a hospital-sponsored group or an employee in a physician-owned mega-group. And while this may cause more nightmares among healthcare executives than the worst horror flick, I believe that it is fair to say that not only are they back, I am pretty sure they are here to stay!