[Scene: Small meeting room crowded with blue suits. A 40ish HR director in blue button-down and khakis. The brokers look restless as the HR director talks.]
Look guys, all these ideas to drive down costs through self-insurance, high-deductible plans, consumer tools, mandatory physicals, etc. It’s just too disruptive. Our people are fried from all these changes. We were bought by a PE firm last year, and we have made a lot of changes—unpopular changes.
[A young woman, 30ish, enters. Looks flustered.]
Rufus and Doofus brokerage team, meet Karen Dinero, our new CFO.
[People shake hands. The CFO grabs a proposal and flips rapidly through the back pages.]
HR: Well, Karen, before we jump to the bottom line, we should acknowledge the Rufus team has done an excellent job negotiating the initial insurer request for a 26% increase down to 14%. We have discussed making some of the plan changes you see on page five. If we make most of these changes, we would be in for a net increase of 6%, which is under the placeholder of 8% I submitted during the budget meetings.
[CFO sighs as she flips to recommendations.]
Bob, 6% against a $10 million spend is still $600,000. That’s about $7.2 million of shareholder value at a 12 multiple. We are a $200 million company with 1,000 employees. We spend $10 million a year on healthcare—5% of total revenues. We only average $200,000 per head, and in this crappy economy we’ve been flat on revenues for two years and missing our pro forma. Earnings now have to come primarily through cost cutting. Our gross per capita healthcare spend is what? Around $10,000 per worker? And our per capita profit is around $20,000 and declining? I see here in the recommendations that the savings from a financing conversion to self-funding could save us conservatively 6% to 8% on taxes, fees and risk charges? That’s another $800,000! At my last firm, we carved out pharmacy benefits and found another 10% savings across the RX spend, which was 20% of our claims.
[HR manager turns bright red. The lead insurance producer leans forward.]
Karen, do you play golf?
[The CFO stares incredulously at the producer while the HR director attempts to gain control of the meeting.]
Karen, before you arrived here, we were self-funded, and it was a train wreck. We had all these large claims and no cash flow. It was a nightmare for accounting. As far as ideas like this one—carving out the pharmacy benefits—it’s my understanding we would have to have two insurance cards: one from our insurer and one from the new pharmacy manager. That’s a lot of disruption and, frankly, a lot of work for not much upside.
[CFO drops her pen and rubs the bridge of her nose.]
Bob, I’m just wondering what’s more disruptive—producing $1.2 million in savings that don’t increase contributions or cut benefits, or asking employees to carry an extra card? Or should we lay off $1.2 million worth of staff to achieve the optimum income improvement we need. Frankly, I’m only half way to the $2.5 million in run-rate savings that I need to give our investors an adequate rate of return. If we don’t do it this way, we will freeze salaries, lay off people and not give bonuses. I’d call that disruptive.
[CFO glances at her watch and offers a crocodile smile.]
OK, based on my math and some of these ideas, we are at $950,000. What else have you got for us—and by the way, how do you guys get paid?
[Insurance producer looking genuinely surprised.]
Uh, I was told there would be no math at this meeting.
[Fade to black.]
It’s a scene played out all too often these days. Employers are scratching for every possible advantage to improve earnings and deliver returns in a single-digit business growth environment. Traditional levers of cutting benefits or raising contributions have proven increasingly ineffective. Rising unit costs, opaque pricing practices, rising consumption of unengaged consumers and declining public health all erode employers’ ability to rein in costs.
While human resource and benefit managers have served as stewards for their employers’ plans, the C-suite has been relatively unengaged. A renewal meeting often finds the CFO and/or CEO giving HR little time to cover a range of critical issues while instead focusing on year-over-year costs (and checking to make sure their personal providers are in the PPO network).
HR has been increasingly estranged from finance, and neither side sees the big picture. Where HR is disruption-averse and the CFO disengaged, firms are losing ground to rising healthcare expenses. The best firms are engaged and witnessing a resurgence of interest from the CFO and C-suite.
A new breed of CFO is on the rise—one that brings both EQ and IQ to their position. This new class of bilingual change agents is seeking to help manage costs and culture—areas deeply affected by healthcare. What was once a more limited role of controller/treasurer, focusing on compliance and financial accounting, has become an elevated fiduciary mission to maximize the value of every procurement dollar. Companies that succeed in taming the medical trend without cutting benefits or increasing contributions are doing it with engaged CFOs creating new ties between HR and finance. Together, they attack the root causes of rising costs.
Most effective CFOs understand a good fiduciary first seeks to eliminate risk. When risk cannot be eliminated, it can be reduced through loss control and mitigation programs. Once the scope of savings is defined from risk mitigation, an employer then seeks to retain as much risk as feasible—as it is cheaper to retain risk than to pay a premium to transfer it to a third-party insurer.
After all avenues are exhausted, any remaining risk can be transferred through insurance. Insurers compound this process by making it difficult to get data to understand risk patterns. Risk retention is often discouraged by insurers through uncompetitive self-insurance pricing causing employers to default to risk transfer as their primary means of cost control. This leads to health insurance being treated as a commodity instead of a business risk to be managed.
Rising CFOs understand incentives are not limited to money. Moral, social or cultural incentives can drive behavior. Engaged CFOs recognize at least half of all healthcare consumption involves a point-of-service decision by a consumer who chooses a drug, a provider or an elective procedure. Incentives can save dollars and accelerate reform.
Today’s healthcare stakeholders bank on low levels of stamina within HR, limited consumerism, weak intermediaries and intolerance to disruption as levers to get employers to pay higher prices. A rising CFO knows the point at which it makes sense to endure administrative disruption.
The lack of transparency in healthcare is crippling American business. Rising CFOs recognize their business must drill deeper into costs and focus on principles, not personalities. They help HR tear apart traditional insured financing arrangements in search of pockets of unnecessary costs buried in obtuse pricing schemes.
The best CFOs understand that, if a firm is too sensitive to disruption, they can’t change people or the practices that inflate costs. Instead, rising CFOs position their firms for the future by building bridges. They put everyone on notice that a little sunlight is often the best disinfectant.