The Cost of Healthcare: Should Employers Stop Worrying?

A report published by the Institute of Medicine (IOM) on high-value health care attracted attention when it was issued last June. Authored by a group of eleven leading hospital executives, A CEO Checklist for High-Value Health Care describes programs at various hospitals that resulted in quality improvements and lowered costs. The report has a section called "Yield," quantifying the extent of these improvements. These programs sound notable, and in fact I know some of the executives and hospitals involved, and would vouch that many significantly improved patient care.

But the report is less impressive when it tackles the cost side of the value equation, especially when it names cost control outcomes like: "days cash on hand increased from 180 to 202," and "multiple years of 4-5 percent [hospital] margin." Clearly, the hospitals improved their own bottom lines, but by how much did patient bills decrease? The hospital executives don't account for that in the "yield."

It seems this report defines "high-value" to mean highly valuable to hospital CEOs. Strikingly, though, the authors do not find it necessary to explicitly say so anywhere within the report. Perhaps they simply assume that a high-value checklist for hospital CEOs is automatically high-value to CEOs in other industries that are paying for services from hospitals. No offense to these well-meaning and highly accomplished hospital executives, but that is not always the case. Purchasers don't see high-value health care in hospital cash flow or profit margins. They see value when they get the best service at the best price.

Involving Employees
The contrast between value as seen by hospital executives and value as seen by purchasers is evident when you compare this report with a 2010 book ("The Company That Solved Health Care: How Serigraph Dramatically Reduced Skyrocketing Costs While Providing Better Care, and How Every Company Can Do the Same") by John Torinus, CEO of a company called Serigraph, a manufacturer of parts used to make vehicle instrument panels. He became interested in health care value when his health benefits expense started to eclipse his profits. Torinus might as well have written his book in a different language than the hospital executives in their report. For instance, the only "yield" Torinus notices from hospitals are the painfully obtuse bills they generate. He paid his employees to find mistakes in their hospital bills — and that alone saved him a lot of money. The hospital executives never mention such mundane things as hospital bills, but Torinus sure found opportunities to improve value there.

Torinus describes how he saved money by offering his employees a high-deductible health plan combined with a tax-protected health savings account. He is not alone; today this type of plan is among the fastest growing of all forms of commercial coverage. It means employees use their own money to pay hundreds if not thousands of the first dollars of their health spending every year, which motivates them to consider price when selecting a doctor or hospital. When you are using your own money, suddenly it matters that the MRI your doctor ordered costs $2,500 at one hospital and $750 at another. As Torinus saw it, when employees look for both quality and price, both improve.

A Need For Transparency
The last — and important — difference between the two publications is the issue of transparency. The hospital executives include transparency on their checklist for high-value, but they call it "internal transparency" — meaning information on performance should be fully available to the people working at the hospital. Torinus wants a different kind of transparency, market transparency — for information on quality and pricing to be fully available to employees, patients, and all consumers. Today, purchasers see transparency as critical to getting value, and they want disclosure of both quality and pricing. Two purchaser-led campaigns for this include The Leapfrog Group and Catalyst for Payment Reform.

In his new book, "Catastrophic Care: How American Health Care Killed My Father--and How We Can Fix It," David Goldhill argues that this confusion between costs and prices — and the lack of market transparency — are at the center of the nation's very serious economic problems. Because nobody agrees on who the customer really is in health care, and prices are never discussed in polite company, the invisible hand of the market can't perform surgery when quality and cost-effectiveness lag. Goldhill points out that the implications of this are potentially catastrophic, hence the title of his book. The escalation in health spending displaces wage and job growth throughout the economy and threatens to balloon the federal deficit even further.

Employers can't afford to wait for politicians or health care executives to solve this problem. Now is the time to define what they mean by value and purchase accordingly. Instead of worrying about somebody else's health care costs, start worrying about your health care prices. After all, the most unaffordable price of all is the price of inaction.

This article first appeared on Forbes.com.