Financial Wellness

Employee Healthcare Cost Containment - A Strategy that Works

American employers will be looking forward to another year of rising healthcare costs for their employees and dependents. Despite countless incremental solutions such as wellness programs, consumer driven healthcare and provider payment reform, there has been very little impact on both the quality and the price of healthcare for employers.

It is time for a fundamental new strategy. At its core is a need to maximize value for patients - "value-based healthcare." Value-based care delivers the best outcomes at the lowest cost. Every stakeholder has a role to play including employees, employers, benefit consultants, providers, health plans and innovative healthcare vendors.

So what is the primary goal of value-based healthcare? To date, healthcare reform strategies have been hampered by lack of clarity in defining this goal. Limited goals such as discounted fee for service pricing or improving access to care have not delivered the proper results.

Neither improving access to poor care, nor reducing the cost at the expense of quality are desired objectives. In healthcare, the primary goal must be improving the health value to patients. Where the health value is defined as the patient outcomes achieved divided by the cost of achieving those outcomes.

Furthermore, what matters must define these outcomes for patients. Improving value occurs by either improving outcomes or reducing costs or ideally both. So how do employers move towards a value-based healthcare delivery system within their organization? The strategy involves four interdependent and fundamental components. Below is a description of each component.

  • Population Health Management
  • Directing Care to Maximize Value
  • Bundled Case Rates
  • Measure Outcomes and Costs

Population Health Management (PHM)

Unfortunately, a majority of patients in the U.S. are not getting the care they need. This gap between nationally recognized evidenced based medicine guidelines and the care patients are currently receiving is termed "gaps in care." These gaps lead to poor patient outcomes and much higher costs.

Physicians have traditionally acted in a reactionary fashion - managing acute problems with little focus on prevention. In addition, a RAND study in 2003 showed that 55% of medical care received by patients does not follow nationally recognized, evidenced based medicine recommendations.

Worsening the issue is patient non-compliance with recommended care. With effective PHM strategy high-risk patients, who usually have the most gaps in care and are predicted to cost the most in near term future healthcare costs, are identified and targeted for clinical intervention.

Telephonic engagement strategies have been widely ineffective to date and employers must look for worksite solutions or strategies that direct care to community providers that have demonstrated an ability to execute PHM effectively. Solutions that have demonstrated the most success utilize the following tools.

  • Predictive modeling software and electronic medical records with imbedded evidenced based medicine algorithms and alerts that identify high-risk patients.
  • Automated outreach systems that communicates with patients in a rule based algorithm via multiple modalities to drive engagement.
  • Medical home model personnel that address healthy behavioral choices (health coaching) as well as psychosocial obstacles and issues with compliance.
  • Care coordination with all providers delivering care to the patient.
  • Continuous measuring and reporting to track performance.

Directing Care to Maximize Value

The second component of the strategy is to direct certain medical services to facilities and providers that have demonstrated the best outcomes at the lowest cost for those particular services. This component has several key features including, partnering with centers of excellence, price and quality transparency, patient advocacy, and a value-based employee incentive plan.

Routine, low complexity services should be moved out of academic centers and hospitals to lower cost facilities with lower fees. An example of this is a knee arthroscopy, a simple procedure to diagnosis a complaint of knee pain and swelling. Patients in need of this service should be shifted away from a tertiary hospital to an ambulatory surgery center where the price can be cut in half without jeopardizing quality.

On the other hand, a patient requiring a complex surgery for a heart, spine or cancer issue can be directed to an identified center of excellence that has the necessary resources and experience to maximize the patient outcome. The features necessary to achieve this direction of care are described below:

a) Identifying Centers of Excellence - There exist in almost every region of the U.S. integrated medical systems that have demonstrated their ability to deliver superior patient outcomes at a lower cost for different groups of conditions such as heart, cancer, spine and transplants.

When surgery is required, their patients recover faster, spend less time in the hospital, experience fewer complications and have less days away from work. These centers of excellence all share a common strategy, namely, the presence of an integrated practice unit (IPU) made up of a team of both clinical and non-clinical persons providing the full episode of care for the patient's condition.

Take Virginia Mason's Spine Clinic approach to low back pain. Their team works in an integrated way pairing a physician with a physical therapist. More serious cases are identified earlier and immediately placed into a process that can address these complex issues. The results are striking. Patients at the Spine Clinic miss fewer days of work as compared to regional averages, need fewer physical therapy visits, and utilize expensive MRI imaging considerably less.

b) Price and Quality Transparency - With the advent of consumer driven healthcare the need for tools to empower employees in making informed healthcare decisions has never been greater. Provider price and quality transparency gives healthcare consumers the same type of information they have come to expect with other buying decisions (for example when choosing to purchase an appliance utilizing Consumer Reports or when buying an automobile with the assistance of Kelly Blue Book).

Price transparency, offered as an employee benefit, leverages the wide range of negotiated carrier prices for a particular service in a geographic marketplace. A number of health plans offer watered down versions of this service and several vendors such as Healthcare Bluebook, Compass, and Castlight provide a much more granular picture including estimated out of pocket cost comparisons.

Layering quality rankings on top of price transparency allows consumers to calculate the value of the care (quality divided by the price) and make a sound healthcare decision that best meets their needs. However, meaningful quality measures are much more difficult to assess and often require access to provider data, claims data and sophisticated analytical tools.

c) Patient Advocacy is not needed in a perfect world where the delivery of healthcare is organized into IPUs centered on the patient's needs. However, our current healthcare system is predominantly delivering unorganized, fragmented care quite often in different locations with a multitude of providers who are not communicating with each other.

In such an environment, patients need a patient advocate to assist them in navigating the healthcare system. The patient advocate can address a number of patient needs including directing care to value-based providers, answering questions about their medical condition and treatment plans, assisting with medical bills and insurance questions, scheduling appointments, and managing the transfer of medical records.

d) Value-Based Benefit Design (VBBD) VBBD is a way for employers to enable and encourage employees and dependents to make the best health care decisions for their medical condition. VBBD is focused on the manner in which a purchaser uses its buying power to maximize the value that it receives from its entire health benefit program.

An employer utilizing VBBD will integrate identified centers of excellence, price transparency tool, case rate negotiations, chronic disease evidenced based guidelines, and other relevant programs into their benefit design plan. The plan will modify employee contributions, employee deductibles and copays, and tiered pricing for different medical services and providers in order to direct care to value-based solutions.

Bundled Case Rates for Episodes of Care

Neither fee for service or capitation, the major payment models in healthcare, are aligned with incentives for value-based care. Fee for service rewards providers for how many services they provide. The more services, the greater the reward. Capitation rewards providers for spending less, but not necessarily for improving quality of care or outcomes.

The payment model best aligned with the goal of value-based care is bundled case rates. This bundled payment model covers all care delivered for an acute medical condition requiring medical care such as a surgery or hospitalization. It also can be tied to chronic conditions such as diabetes where the payment and outcomes are tied to a defined period, usually yearly, called a cycle of care.

The payment for the acute or chronic condition is negotiated upfront and attached to performance guarantees. The performance guarantees are based on outcomes that can be controlled by the providers and measured. The performance guarantees are patient centric meaning they matter most to the patient.

This approach is aligned with value-based care because providers are now given an incentive for cost efficient care with the best outcomes. For example, with low back surgeries it turns out that the parameter most directly related to time away from work is not the facility, nor the surgeon, but actually how quickly a patient enters into a physical therapy program after surgery, how effective the program is, and the level of patient compliance with that program.

Therefore, for spine surgery case rates, physical therapy parameters would be an important part of the performance guarantees. Bundled payments for transplants have become very prevalent in the U.S. And those medical facilities that have demonstrated the greatest value are now considered centers of excellence and have benefited greatly from higher revenue streams. Many employers have already adopted bundle payments.

Companies like Walmart and Safeway have introduced programs to encourage employees to utilize centers of excellence that have demonstrated superior outcomes, not only for transplants, but also for surgeries such as cardiac, spine and oncology. Such centers of excellence include facilities like Cleveland Clinic, Geisinger, Mayo Clinic and Virginia Mason.

The employers negotiate bundled case rates that cover all physician and hospital costs during the entire episode of care including post-operative care. The employer typically pays for all travel, lodging and meals for the patient and caregiver.

Measure Outcomes and Cost

Systematic measurement of results is the key to improving results in healthcare. Therefore, it is critical that employers have a tracking system in place to measure both the cost of care and the associated patient outcomes. This is much like swimming against the tide because the healthcare industry is amazingly void of both quality and cost measurements.

Few clinicians have any idea of the cost of care for each component of treatment they order. In addition, when outcomes measurements are done, which is very rarely, they only track a few areas such as safety and mortality. Outcomes should be measured in several different ways and all should be patient centric.

For acute conditions such as those that require surgery, the outcomes measured can be divided into 3 categories - namely, treatment experience, short-term improvement and long-term improvement in health status.

  • Treatment experience - includes outcome measurements such as length of hospital stay, rate of complications, readmission rate, need for second operation and patient satisfaction.
  • Short-term improvement - includes outcome measurements such as time to return to work, functional level of improvement, and pain improvement within the first year.
  • Long-term improvement - includes outcome measurements such as functional and pain levels at greater than 1 year, need for surgical revision, and long-term complications.

For chronic conditions such as asthma or diabetes or CHF, the outcome measurement parameters are different and include compliance with evidenced based guidelines, number of ER visits or hospitalizations, rate of complications, and quality of life scores. When measuring cost of care it must be done on the condition level.

That is tracking expenses involved in the treating of a condition over the full episode of care or, for chronic conditions, over the full cycle of care. This can be simplified if the employer enters into bundled case rate agreements with facilities for acute care.

However, for chronic disease care such as diabetes it requires access to all claims data and the ability to track claims for a subgroup of patients based on a particular condition. Employers can then track the cost of care for patients with this chronic condition over time to determine if the costs are improving.

Furthermore, employers can dissect the cost components to a more granular level and evaluate cost components individually such as hospitalizations, ER visits, pharmaceutical costs and specialty costs.

Implementing Value-Based Care

Building a value-based employee healthcare program requires an ongoing effort and commitment by the employer. By necessity, it requires strong leadership and vision. It cannot be accomplished with one monumental implementation effort. Rather, it requires a stepwise approach building upon the foundation of each prior accomplishment.

All non-clinical stakeholders including benefits executives, financial executives, benefit consultants, health plans, third party vendors, and employees must all work together to realize their mutual goal.

Resistance will be inevitable and must be anticipated. However, maintaining a course towards a value-based system will lead to enormous financial rewards for any employer and improved health and productivity for the plan members.

About the Author

Dr. Jonathan Spero is the CEO of InHouse Physicians and a thought leader in the area of cost containment solutions for self-insured employers. Dr. Spero graduated medical school from the University of California, Davis.

He completed his residency in Internal Medicine from Scripps Mercy Hospital in San Diego and has practiced both internal and emergency medicine. InHouse Physicians is a global employee health and wellness provider delivering ROI driven worksite health centers and innovative cost containment solutions to corporations around the world. To learn more visit InHouse Physicians at or Dr. Spero can be reached at

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