OPEN LETTER TO CEOs: PART 1 – YOU MUST DRIVE HEALTH CARE STRATEGY

WHY YOU MUST DO IT

Dear CEO:

Reality check

It’s time to face the hard truth. For too long, you’ve sidestepped the issue of soaring health insurance costs by handing the problem over to HR managers who lack the means, motivation, or strategic authority to fix it. As a result, your company’s standard coping mechanism has become an annual ritual of hiking employee deductibles, copayments, and premium contributions to defray the costs of an increasingly unaffordable benefit. Such actions—all under your nominal stewardship—amount to nothing more than tactical responses to a strategic problem that demands a strategic solution. I know you don’t want to hear this, but you’re the one who has to drive that solution.

Yes, I know that, for Type-A’s like you, managing health benefits can be a real snoozer, especially when it’s such a departure from your core strengths and from the primary market focus that your business demands for maximizing shareholder value. Even when I ran companies—and those were health care companies—I felt the same way. That’s a major reason why CEOs have always delegated it to staff, not line managers. It’s even worse if you have an ERISA self-funded plan. Instead of treating it like the full-blown insurance subsidiary it really is, you pretend it’s nothing more than a health benefits purchasing function which you continue to delegate to HR. Even as a purchasing operation, you haven’t applied your exquisitely refined supply-chain management system long used for your “real” business, even though medical services make up your largest single non-wage expense.

I don’t want to appear to be beating up on your HR folks because I’m not. Some of the most capable executives I’ve worked have been the HR managers who effectively juggle a massively challenging set of responsibilities for hiring and firing, labor law compliance, employee orientation and development, labor relations, performance management, compensation, retirement benefits, and health benefits. The problem is that the requirements for effectively managing that last item have long since transcended the skill set of even the most capable HR executive, with the possible exception of the vanishingly rare individual who has actually run a managed care organization.

You may have found some comfort in managing your health benefits the same way everybody else does, which includes outsourcing critical functions to third-party vendors whose interests often conflict with your own. And you may even boast about your innovative wellness program, even though most companies have wimped out by rewarding nominal employee efforts rather than real achievements to stop smoking, lose weight, and otherwise reduce personal health risks.

So let’s face it; employers have done a terrible job deciding for your employees what benefits they can have, what doctors they can use, and how much they have to pay for it all. As hard as your managers may have tried, the result constitutes a terrible, paternalistic substitute for savvy consumers armed with the responsibility to spend their own money to get the medical care they need.

You already know what you need
Yet, in your gut, you know what you need to do. For years I’ve asked you this question: “If you could stop buying insurance for your employees and just give them the money you’ve been spending on it so that they could buy their own coverage with equal or better benefits for equal or lower premiums, would you do that?” Without exception, you’ve answered “Yes.” I should tell you, however, that your HR managers have been less than unanimous in their responses to the same question. In any event, my query has been an academic one, since the option I’ve posed isn’t available. Too many of your employees (and dependents) have serious medical conditions that prevent them from buying individual coverage at any price.  But that’s about to change.

A whole new ballgame
The new health reform bill’ s (ACA) creation of the insurance exchanges promises to be a real game changer that will give you exactly what you’ve been telling me you want. Starting in 2014, small employers (and in 2017, large ones) will be able to fund their employees to buy their own coverage through the exchanges according to their own needs, means, and circumstances. Most will choose high-deductible health plans (HDHPs) because, by then, those will be just about the only ones still affordable.

If you don’t start now to prepare your employees for the challenges they will face under this new regime, you will do them—and your company—a grave disservice. And make no mistake; you personally are the one who has to make it happen, because it will require tough decisions that some—perhaps many—of your employees aren’t going to like. And if employees won’t like it, neither will your HR folks, because they’re the ones who will get the complaints.

So what are these draconian changes that only you can effect? There are two. First, you need to skip ahead several years of those gradual employee cost-sharing increases and impose them now all at once. Second, you’re going to have to get out of the health insurance business as soon as you can. Do it right and you’ll be surprised how easy the transition will be.  Do it wrong and you’ll have some very righteously angry workers who’ll be stuck with medical bills they can’t pay because you didn’t give them time to become the responsible savers and consumers they must be to weather the new era of health reform.

In Part 2, I’ll tell you specifically what you need to do.

Until then,

Steve

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8 Responses to OPEN LETTER TO CEOs: PART 1 – YOU MUST DRIVE HEALTH CARE STRATEGY

  1. Huson Middleton says:

    Steve, most of us are aware of the coming changes as prescribed in current law. But what if Obamacare is declared unconstitutional and we’ve made these severe changes in our employees’ health insurance coverage. Should one wait until the courts’ directions are clearer? Already one judge has declared it constitiutional and another in a different state has moved the case forward to allow a jury trial. It certainly appears to be headed to the Supreme Court.

    Steve Replies: An excellent question which I will address more fully in a future article. The shorter response is that both Democrats and Republicans are suffering under a misconception that the individual mandate (challenged by the lawsuits) is the only way to control adverse selection in which people delay buying insurance until they get sick, thus dooming the insurance companies. There is an even more effective alternative in the form of penalties and restrictions on late enrollment, which I wrote about last year (see http://www.hydeonhealthcare.com/individual-mandate-buy-health-insurance.html ).

    While I actually hope the Supremes find the mandate unconstitutional, I also hope the powers-that-be will do what needs to be done to fix the exchanges and allow them to function to their full, revolutionary potential to help right our capsizing health care financing and delivery system.

  2. Randy Dipner says:

    Two questions:
    1) Given the minimum benefits required in ACA,will high deductible plans even be legal as an offering of the exchanges?
    2) I have read a variety of opinions on whether HSAs will be allowed under the ACA when (if) implemented.
    3) If HSAs remain available, will they be usable for actual insurance purchase or just for paying medical costs like deductible expenses?

    We have used the high deductible/HSA formula for about five years now and it would be a welcome addition to let our employees select their own coverage plan on the exchange rather than shop the limited market every year.

    Steve replies:
    1. Yes, as long as the Secretary of HHS does not thrown in a mandated benefit that conflicts with HDHP’s definitions.
    2. There is nothing in ACA that specifically conflicts with HDHP. Two potential problems are (1) conflicting definitions of covered benefits (see above) and (2) if inflation drives the minimum HDHP deductible above the $2,000 maximum deductible imposed by ACA. However, don’t underestimate the political power of the growing millions of people with HDHPs and HSAs who will not take kindly to the government adding tax insult to ACA injury if it tries to eliminate HDHPs.
    3. HSAs can’t be used to pay insurance premiums (except Medicare premiums). That hasn’t been changed. It should be, though.

  3. Randy Dipner says:

    OK, it was three questions. I hit the submit button too quickly.

  4. John Sweeney says:

    Actually, I’ve had a self-administered “plan” for years. We give the employees cash to buy their own coverage. Only two employees came a’cropper: one whose wife got MS and one whose wife got something undiagnosable in Africa. That was hard (but solvable, it turned out) for them but not having a cancer growing at 8-10% a year on our income statement ennabled the company to grow while the other 94 people almost all purchased sensible coverage rather than golden coverage.

  5. Stephen Hyde says:

    Steve Replies: While your company undoubtedly gets to expense the cash paid to employees to buy their insurance, are you able to extend to them the tax exemption they would have received under a group plan?

  6. Pingback: Open Ltr. to CEOs: You Must Drive Health Care Stratey Part 2 | Stephen S. S. Hyde On Health Care Reform Topics

  7. Actually, I’ve had a self-administered “plan” for years. We give the employees cash to buy their own coverage. Only two employees came a’cropper: one whose wife got MS and one whose wife got something undiagnosable in Africa. That was hard (but solvable, it turned out) for them but not having a cancer growing at 8-10% a year on our income statement ennabled the company to grow while the other 94 people almost all purchased sensible coverage rather than golden coverage.

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