Innovation and Disruption

Turn of the Worm

May 23, 2017 10:23 am

At this year’s Berkshire Hathaway shareholders’ meeting, Warren Buffett described medical costs as “the tapeworm of American competitiveness.”

Buffett’s comments came as part of a broader discussion of corporate taxes in the United States. He noted that corporate taxes, as a percentage of gross domestic product (GDP), have fallen from 4 percent in 1960 to 2 percent today. Healthcare costs, on the other hand, have risen from 5 percent of GDP to more than 17 percent. Given that, as of 2015, almost half of all Americans were covered by employer-sponsored insurance (49 percent, according to the Kaiser Family Foundation), the answer to the question of whether corporate tax rates or healthcare costs are a bigger drag on the competitiveness of U.S. corporations is obvious.

Warren Buffett is fond of the tapeworm metaphor: He also used it to describe the impact of inflation in the 1980s. But the pressures of mounting healthcare costs on U.S. businesses may also bring to mind the old proverb, “Tread on a worm and it will turn,” meaning that even the most insignificant creature will push back when pressures become too great. U.S. business interests are a considerably more significant creature in the healthcare space.

This trend is combined with a return to near-full employment in many markets. Employers can be wary of making changes in healthcare benefit design when the need to recruit and retain the best employees becomes more intense. It is perhaps ironic that the return to near-full employment has been driven in large part by growth in the healthcare industry. The healthcare industry now employs one in nine Americans, up from one in 12 in 2000, and 35 percent of the nation’s job growth since the Great Recession began in late 2007 has been in health care—the biggest sector for growth.

The cost of health care remains a concern nonetheless. Growth projections for national healthcare expenditures from 2016 through 2025 predict an average annual rate of growth of 5.6 percent. This prospect means that, by 2025, healthcare expenditures as a percentage of GDP will have risen still further, claiming an additional 2.1 percent of GDP (from 17.8 percent in 2016 to 19.9 percent in 2025).We have long heard that healthcare costs are unsustainable at the current level of percentage of GDP. If that is true, will even higher levels of unsustainability finally cause the worm to turn?

A Commitment to Coverage and Cost Control

The good news for health care is that employers have moved away from a deep questioning of whether they could continue offering healthcare benefits. Their confidence in doing so experienced a sharp decline in the wake of the Great Recession, dropping from a high of 73 percent in 2008 to a low of 23 percent in 2012. The percentage of employers now expressing confidence in offering healthcare benefits has rebounded to 54 percent. But renewed confidence in offering healthcare benefits comes with a commitment to controlling the costs of doing so.

Cost-control strategies already implemented by employers responding the Willis Towers Watson survey include the following:

  • Offering an account-based health plan 
(ABHP)—a high-deductible plan with a health savings account—as their only plan (This strategy is a significant factor in the rapid growth of the percentage of employees in ABHPs, with 25 percent of survey respondents now offering ABHPs as their only plan.)
  • Giving employees access to centers of excellence for specialty services (including orthopedics, cardiology, and infertility services)
  • Offering narrow networks of high-quality, efficient medical service providers, which is an approach employers traditionally have been reluctant to use out of a concern about restricting employee choice (Notably, this year’s survey found that 20 percent of employer respondents are now offering such narrow networks, up from just 11 percent in 2016, and that another 39 percent could add them over the next three years.)
  • Reducing point-of-care costs for employees who use high-value services and increasing those costs for employees who use commonly overused services (This strategy is relatively rare today, with about 10 percent of survey respondents using it, but that number could grow to more than 40 percent by 2018.)

Around the country, employers also are experimenting with reference-based pricing strategies, on- or near-site clinics and telehealth strategies that can reduce emergency department utilization, and transparency tools coupled with shared savings for employees who select high-value providers. Employers also are becoming increasingly transparent about the percentage of salary and benefits that is being taken up by healthcare costs, reminding employees that a lower cost for healthcare benefits can mean more salary dollars in their pockets.

The healthcare industry may already have dodged a major “turn of the worm” during the nation’s most recent period of economic distress. The economic rebound has alleviated some of the pressure that drove employer confidence to its low point just five years ago. But Warren Buffett has reminded us that the pressure has not gone away, and ongoing efforts by employers to control healthcare costs are not likely to go away either. Healthcare organizations that work with employers to achieve their goal have much to gain.

James H. Landman, JD, PhD, is director of healthcare finance policy, perspectives and analysis, for HFMA.


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