A perspective from Ken Hahn, CFO of Collective Health, originally published in Employee Benefit News
If you’re an employer providing healthcare for your employees, you’ve likely noticed that it is one of your company’s biggest cost centers, yet it’s far and away the most opaque spend. Traditional corporate thinking might pin this as an issue for finance to sort out, but there is another critical function in the organization that is equally frustrated about the lack of visibility into healthcare costs: HR. It can, and should be, better for both.
Delivering a great healthcare experience and controlling costs need not be competing priorities
For years, benefits leaders have struggled to get the data they need to properly measure the effectiveness of their programs and take more control. While the dynamics between HR and finance are different at every company, when it comes to health benefits, they share two common goals: optimizing their spend and continuing to find ways to attract and retain talent.
Together, finance and HR can be a powerful force for change in how a company manages its healthcare investment as long as they align around a guiding mantra—delivering a great healthcare experience and controlling costs need not be competing priorities. Here are three metrics that benefits and finance leaders should align on in order to truly evaluate benefits ROI.
1. Medical trend
The annual percentage change in per employee medical costs is known as “medical trend”—an important metric that can help companies quantify their healthcare programs. Most insurers, brokers and consultants are able to provide employers with their medical trend on an annual basis, but it’s important to know what you should be looking for.
First, you want to understand how your organization stacks up—the industry average is a 5% annual increase—and how much money you can save by controlling the spend. For example, a company that spends $192 million a year on medical costs would save $60 million in three years by keeping their costs flat. That’s just math that any finance org can do easily.
Secondly, you want to understand the data you should be looking at as part of overall trend—namely, employees’ utilization and care optimization. Your organization can save if your employees simply use less care, yes, but it will likely cost you more in the long run (both in dollars and cents and vis-a-vis productivity). It’s important that you encourage employees to avoid seeking care only when the issue is acute (and expensive) and instead take advantage of preventive programs.
The key metrics: Decrease in overall medical trends and optimized changes in employees’ care utilization
2. Operational efficiency and employee productivity
Historically, health benefits have been a highly manual, time-consuming administrative nightmare. Benefits leaders have to manage multiple vendors, spreadsheets, data and technology systems from a multitude of sources, all while fielding employees questions about their options. That’s changing, however, as new tools and better access to data allow the HR suite to spend time on higher value activity to the company. By taking your focus away from various back office activities, you can focus on areas that affect business productivity—for example, ensuring your overall benefits are competitive in the market, introducing new onsite wellness programs, or analyzing how benefits impact employee retention (more on that later).
A present workforce is a productive workforce, and illness and health-related issues are one of the leading causes of absenteeism. Studies by the U.S. Census Bureau and the Bureau of Labor Statistics estimate that the direct financial losses due to absenteeism are more than $40 billion a year, while additional research suggests that if illness-related absenteeism were a line item on a company’s profit and loss statement, the cost would likely exceed 15% of profits.
Better engagement with healthcare can reduce employee’s time out of the office and improve productivity. One example: behavioral health issues, which are often highly and cost-effectively treatable, often go untreated (even by those with health insurance); 217 million days of work are lost annually due to productivity declines related to this issue, costing United States employers $17 billion each year. This is just one example of health conditions that can be better managed if you can understand how they affect your particular population and tailor your health benefits to meet employees’ needs.
The key metrics: Reduction in HR time spent on back office administration, increased productivity and decreased sick days
3. Workforce health
Think of the health of your workforce as more than just your employees’ physical or mental health. In a highly competitive employment market where unemployment is currently at 4.1%, workforce health is about creating and maintaining the best team to meet your company’s needs.
A great opportunity arises when lowering medical costs: the option to reinvest the savings back into your most critical people resources. Sure, you could choose to drop those savings down to the bottom line for better profit margins. However, you can also choose to invest in new health benefits that set you apart, such as behavioral health and fertility, and increase other parts of their benefits package—for example, higher matches on 401(k)s.
As you lower medical costs, your employees will soon see less money coming out of their paychecks to pay for their premiums. You can trade that off to increase overall compensation (today, 9.3% of total compensation for employees goes to healthcare costs, up from 5.6% in 2001).
The key metrics: Increased ability to attract top talent, reduced attrition rate and increased employee satisfaction
Historically, it’s been challenging to measure healthcare spend, but the market is changing to enable better management. Thanks to new tools, companies can effectively use data to analyze where the money is going, where they can save money and where they can provide better healthcare. With the data to manage, HR and finance teams can align and orient to achieve real business benefits.