FORBES: 10 Healthcare Industry Tricks Used To Redistribute Profits Away From Employers


Dave Chase, FORBES Contributor
The healthcare industry has been remarkably effective at extracting as much money as possible out of the U.S. economy despite healthcare being the greatest immediate threat to America. As a group, employers and individuals pick up the biggest portion of the U.S. healthcare bill. Unlike virtually every other input to an organization’s supply chain where the value proposition improves every year, the norm in healthcare for decades is you get less and pay more. Where employers in other industries have seen great improvements in productivity, healthcare hasn’t had a productivity gain in 20 years. In other words, for 20 years there has been a redistribution “tax” from highly efficient companies to the least productive industry in America.
Some company executives worry about the current populist presidential candidates, yet it’s the employers’ own healthcare purchasing practices that are the single biggest driver of the Trump/Sanders phenomena. In a nutshell, the data is clear that healthcare has devastated the middle class. To be clear, it’s not because employers aren’t spending far more on employees than they did 20 years ago. The problem is every one of those dollars and then some have gone to fuel the inexorable appetite of the industry. This has created personal legal exposure to CFOs and HR executives that is snapping many into action.
In this piece, I will highlight some of the most common tricks the industry has masterfully played on unsuspecting benefits leaders. In a related piece, I highlighted the seven habits of highly effective benefits professionals that thwart the these tricks. Summary: As one of the health innovators (ZOOM+) puts it, it’s possible to deliver ”twice the healthcare, at half the price and 10 times the delight.” It might sound too good to be true but employers large and small are doing it and spending 20-55% less per capita on health benefits with packages that are better than what 99% of the workforce gets. It simply takes will. However, one first must understand the tricks that have led to healthcare’s hyperinflation. The healthcare industry has proven time and again that most of the new programs do little or nothing to positively impact the Quadruple Aim, despite touting how great these programs are.
Healthcare is a $3 trillion industry, but conservative organizations such as Pwc say that a third to a half of the healthcare spending doesn’t add value. Beyond the staggering impact on the middle class and legal risk that comes from overspending on healthcare, there is the impact on the market cap of companies. I’ve written previously about a manufacturer spending 30% less per capita on health benefits and how that has positively impacted their R&D investment. Even more impressive is the hotelier spending 55% less per capita on health benefits. In both cases, they are providing health benefits superior to 99% of the workforce.
The table below translates the real or potential impact on a company’s valuation. Thus, in addition to the risk of failing in fiduciary duties by the plan administrator from overspending on healthcare, there is also a case to be made that a company’s board of directors are failing in their shareholder fiduciary duty by not managing the second-biggest-cost item (after wages). Numerous public and private entities have demonstrated that the biggest lie in healthcare is that health costs aren’t possible to control.
The table was a simple calculation that assumed a typical P-E ratio of 20 with commonly achieved avoidance of overspending on healthcare. This shows what is achievable for organizations that want to maximize stakeholder and shareholder value.
Ten costly healthcare industry tricks
This list highlights examples that are some of the largest-cost items. Fortunately, all of these are addressable with a wise strategy. The tricks are present in both fully insured and self-insured companies. However, the ability to take action on them is only available for self-insured companies. Thus, the last trick is dedicated to fully insured companies. Although as I’ve stated before, in reality, fully insured employers are already taking the risk of being self-insured without the benefits. Add your comments if I’ve left out any important items.
I would preface my comments that there are many, many exceptional healthcare organizations and doctors who don’t employ these “tricks” — unfortunately, they are standing out. As Johns Hopkins surgeon, Dr. Marty Makary, points out in this interview, there is a generation of doctors leading the way to stamp out these practices.
#1 – Rationing choices leads to overtreatment
When I asked one of the value-based primary care leaders, Dr. Garrison Bliss, how they were able to achieve 30-50% reduction in surgeries, it was remarkably simple. When patients aren’t railroaded into surgery, as Johns Hopkins surgeon Dr. Marty Makary pointed out so well in his book, Unaccountable, they will choose other options. Starbucks and one of the top hospitals in the country, Virginia Mason, famously found that “90% of what we did was no help at all” when it came to back pain.
In effect, our healthcare system rations choices. Dr. Bliss shared how patients virtually always choose the least invasive and safest option first. However, when hospital-employed primary care doctors are given incentives to refer to high-margin specialty practices, the result is very predictable. Benefits expert Brian Klepper shared how back pain is just the most common example of musculoskeletal (MSK) overtreatment. Based on the evidence-based studies on proper interventions for MSK issues, fully half of MSK procedures aren’t following evidence-based guidelines (something Dr. Makary also points out in his book). With MSK accounting for roughly 20% of healthcare spending for most companies, that amounts to a tremendous sum of money. By simply deploying a modern, evidence-based MSK program, one large manufacturer improved their earnings by 1.7%. Had they gotten all of their employees who had MSK issues to get into the program, their positive earnings impact could have been 5%–how many corporate initiatives can accomplish that? Klepper pointed out that if one extrapolates this to the entire economy, fully 2% of the entire economy is wasted in unnecessary procedures that cost companies and individuals a great deal of money, avoidable medical risk and economic productivity.
#2 – Turning primary care into milk-in-the-back-of-the-store loss leaders
IBM’s analysis of their $2 billion healthcare spend reinforced what many already knew. That is, backroom deals have created a strong bias against primary care that has been highly effective at undermining primary care. The prior item mentioned one example of the collateral damage from an undermined primary care system. One of the other speakers on the docket when I was speaking at the annual customer event of a benefits consultancy was a representative of the state attorney general’s office speaking about the opioid crisis. It is not only costing society but also employers. A key driver of the crisis is perverse incentives that have rewarded the healthcare system. Primary care doctors in volume-driven healthcare organizations tend to over-prescribe opioids despite not having much training in this area.
#3 – Intentionally bewildering drug pricing
By design, drug pricing is bewildering. Pharmacy benefit management (PBM) firms are well known for hidden fees, shell game pricing and taking drug manufacturers’ money to promote specific drugs. With the breathtaking spike in specialty drugs, the lack of proper management of pharmacy benefits is costing shareholders, employees and employers dearly.
#4 – Banking on lack of attention to rare, but gargantuan, claims
The coauthor of Cracking Health Costs, Tom Emerick, pointed out how outlier claims are the biggest driver of the healthcare cost explosion. During his time with Caterpillar and Walmart managing their benefits, Emerick typically found that 6% of the employees in a given year accounted for 80% of their medical costs. They set up their Centers of Excellence program to address that dynamic. It has since become available to any self-insured employer. Related to the aforementioned overtreatment crisis, large employers found that 40% of the planned organ transplants at local hospitals were deemed medically unnecessary when their employees visited high-quality providers such as the Mayo Clinic for a second opinion. This was also a topic that Dr. Makary’s book investigated in depth and found similar inappropriate care in many instances.
It isn’t limited to surgeries. Dialysis management is also a source of extraordinary bills. More than 25 million Americans have chronic kidney disease, and 100,000 start dialysis each year. The only question for employers is when (not if) tremendously costly dialysis claims will occur. Annual costs per dialysis patient can vary between $100,000 and more than $500,000–virtually all of that variation is due to the arrangements.
Evidence I’ve been gathering suggests the healthcare system is capitalizing on the lifting of lifetime caps on benefits since the passage of the ACA. A benefits consultant told me that they’ve seen a 1,400% spike in claims over $1,000,000 since the passage of the ACA.
#5 – Out-of-network claims
The New York Times and others have reported on abuses with out-of-network claims. It was also the trigger for the case where the GAP’s HR leaders are named in an ERISA-related suit for breach of fiduciary duty. Healthcare purchasers have been sold on benefits of “wrap networks” for out-of-network charges. Astute healthcare purchasers have seen there are much better alternatives.
#6 – Inappropriate oncology treatment
Sadly, too much cancer treatment is unproven and lacks evidence. Cancer centers may not follow evidence-based treatment guidelines for certain cancers and too often have limited regard for the devastating side effects patients experience during and after treatment. Financial conflict is rampant at cancer centers with patients and their families’ not being informed before treatment about cost, co-payments and co-insurance. Patients and families are in a greatly compromised and highly stressful situation that can be exploited by the healthcare system. It’s no surprise that there is an explosion of new “cancer centers” despite a strong body of evidence that 50-70% of cancers are preventable. However, the catastrophic misalignment of population health resources creates an incentive to wait until there is the medical equivalent of a 5-alarm fire.
#7 – Opaque prices
Healthcare’s opacity has become a joke that has people creating videos of what it would be like if other industries such as airlines, hotels and restaurants were like healthcare. These videos paint a clear picture of the absurdity that has become standard operating procedure.
#8 – Suppressing release of quality and safety
The power of industry lobbying power is on full display when it comes to hiding quality and safety information from the public despite trillions of dollars in taxpayer money going to the healthcare industry. No issue is a greater focus in Dr. Makary’s Unaccountable book than the transparency revolution that is being driven by forward-looking doctors and their professional organizations disappointed that the industry they have poured their heart and soul into hasn’t stepped up. Not only is it statistically safer to get into an airplane than to be admitted to a hospital, it’s statistically safer to jump out of a plane than to be admitted to a hospital. It’s finally getting media attention that the third leading cause of death in America is preventable medical mistakes delivering tremendous harm, as brutally described in Sarah Kliff’s piece, “Do No Harm.” One of the biggest takeaways from Kliff’s article is how a high-reputation academic medical center clearly has a far inferior safety culture to the community hospital up the road. Despite this, their focus is on building new buildings and newly designed amenities rather than a rigorous and transparent medical culture.
I can’t imagine a corporate travel department allowing an employee to fly with an airline if it suppressed its safety records (even if the FAA allowed this). Yet, every day, employers (and Medicare) allow their beneficiaries to blindly go into hospitals with little or no information on their safety culture despite it being available to the hospital itself. To add insult to injury, most hospitals still bill for preventable medical mistakes. The core theme of Dr. Makary’s book is how every hospital has “Dr. Hodad”–the gallows-humor nickname for “Dr. Hands of Death and Destruction.” Makary points out the absurd reality that hospital executives keep the “Dr. Hodads” on staff as they are often the most profitable doctors on staff. Why? Their rates of complications perversely lead to greater profits for the hospital.
#9 – Encourage standard ERISA plan language
One of the renowned ERISA attorneys, Adam Russo, spoke at the Florida Health Care Coalition annual conference that focused on how employers could revolutionize their healthcare purchasing. During his talk, he pointed out the common trick of providing “standard” language that leads to unnecessarily and dramatically overspending on healthcare.
#10 - Health plan renewals just like the movie Groundhog Day
I will let benefits expert Craig Lack explain the annual kabuki dance involving health plans and employers:
This year’s renewal feels just like last year and three years ago and five and basically the same tactics for a decade. All the tactics heretofore have basically boiled down to three things: shift costs or reduce benefits or limit access to care by offering narrow networks.
Employers have been conditioned to believe the best they can hope for is a less bad rate increase. The CFO asks Benefits/HR for a budget increase target and the culture at most organizations is to preserve the status quo. So, the insurance carriers know the game and the benefits brokers know the corporate culture and the Benefits/HR staff–who don’t want change!
The renewal comes in at 11-14%. The broker/consultants “negotiate” a 3% increase, then compare to national benchmarks at 7% and the CFO’s budget at 8% and there you have it. Check the box. Healthcare is renewed. See you next year. And that’s what passes as healthcare risk management at far too many organizations.
The largest national consulting firms publish articles with size 48 fonts stating that the next year’s trend increase to be expected is only 6.50%–hoorah!
In the old model of healthcare, the supply side dictated the pricing and terms. Today, forward-looking organizations realize that they’d be derelict in their duties to leave these areas unmanaged. In the process, modern organizations are turning what many view as a liability (healthcare costs) and turning it into a source of competitive advantage as their competitors are asleep at the wheel. Unaccountability hasn’t been limited to the hospitals that Dr. Makary highlights. Most of the wellness and disease management vendors employers have traditionally worked with have operated with a similar lack of accountability.
This provides a great opportunity for the most innovative players who are willing to operate in performance-based contracts where their interests are directly aligned with their clients’, not industry suppliers’. It’s why benefits brokers are going the way of the dodo bird but great benefits advisors are worth their weight in gold. It’s been gratifying to see the shift in mindset of benefits consultants that I’ve been meeting when I speak at their events. The right-minded benefits advisors are stepping up to the challenge that they have one of the most important jobs in America.
In the follow-on to this piece, I’ll share the ideas I’ve assembled from a Dream Team of benefits experts who have been proving how straightforward it is to deliver greater stakeholder and shareholder return. In the process, they stop the redistribution “tax” from their organizations to the under-performing healthcare industry.

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