Why Hospital CFOs are Leaving Millions on the Table and What the Best-Run Health Systems are Doing Differently [PODCAST]

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Why Hospital CFOs are Leaving Millions on the Table and What the Best-Run Health Systems are Doing Differently

In this episode, James Jacobi, VP of Employee Benefits at Hilb Group, discusses something that hits every CFO and finance leader in healthcare directly, the runaway cost of employee benefits.

Highlights of this episode include:

• A different way to look at how we talk about cost of healthcare in the industry
• How healthcare and pharmacy costs are outpacing GDP and wage growth
• Difference of benefit strategy versus just buying insurance
• How it is still relevant to a self-funded CFO
• Where to learn more

Kelly Wisness: Hi, this is Kelly Wisness. Welcome back to the award-winning Hospital Finance Podcast. We’re pleased to welcome James Jacobi. James is a VP of Employee Benefits at Hilb Group with over 17 years embedded in the HFMA and deep experience working with hospitals, health systems, and healthcare vendors. In this episode, we’re discussing something that hits every CFO and finance leader in healthcare directly, the runaway cost of employee benefits. Most organizations treat this as a line item to manage at renewal. My guest today says that that’s the wrong frame entirely, and the proof is in the numbers. Welcome, and thank you for joining us, James.

James Jacobi: Thank you so much, Kelly. Really excited to be here. And yes, that is the message today. I’m going to give you a different way to look at how we talk about cost of healthcare in the industry and how it’s increasing and what it really means for your business from a P&L financial perspective, but also from a people perspective and how we can kind of tie some themes here together today. So, here’s quick math that should be keeping every CFO up at night. Right now, healthcare costs to employers are growing at 6% annually after a decade of 3%. Pharmacy costs are growing at 9 to 12%. Why is that a problem?

Because GDP is only growing at 2.5, maybe, and wages went up 3.4. So, we are seeing a huge outpacing in insurance premiums that are outpacing compensation and business growth. That’s not going to work now or it’s definitely not going to work in the next 5 to 10 years. So, here’s a number to kind of put all that in context. The average annual premium for an employer-sponsored family right now is $27,000. That’s roughly the equivalent to a full annual wage of a worker earning 15 an hour. Your benefits line item is not a cost center. It’s a structural drag on your ability to pay your people, compete for talent, and grow your company.

The biggest piece of this is pharmacy. It’s driven primarily by GLP-1s that you probably have seen everywhere by now. You may or may not have a family friend, and you might be using it yourself, but it is the fastest growing thing that’s impacting costs. Drugs went up from less than 1% of employer pharmacy to spend to over 20% in five years and that continues to grow. One employer said GLPs went from the 32nd most expensive drug on their formulary to number one in a single year. So, I want to be clear. What I want audience to hear today, whether you’re a hospital CFO listening to this, you’re ahead of a clinic, you’re a president of a service provider helping the healthcare industry. This all works for you. Doesn’t matter if you’re at 40,000 employees or 50 employees. What we’re going to talk about in this podcast is real. There’s real data, and it’s going to give you some strategies on how you can tackle this to lower your costs and take care of your people.

Kelly: Wow, looking forward to that. Well, let’s go ahead and jump in and learn more, shall we? So, James, you said healthcare and pharmacy costs are outpacing GDP and wage growth. Why is this happening? And why isn’t it slowing down?

James: The problem is this is not cyclical inflation. This is compounding. It’s a structure problem. And this is happening for a few different reasons. One, there’s a lot of provider consolidation happening, more M&A year after year. So, there’s fewer larger health systems that have more pricing leverage with insurers. Hospital prices have driven faster than any other component of medical spend over 25 years. Pharmacy is exploding. Like I just said, GLP-1s alone are reshaping the entire pharmacy cost curve. This is not a blip. The GLP market alone is projected to grow from $22 billion of last year to over a $105 billion by 2030 in the next four years, which is insane, right?

Kelly: Right.

James: Yeah, utilization rebound. There’s a lot of things that happened post-pandemic that we’re still dealing with. Deferred care from that time period is still coming through the system. People who skipped procedures and screenings in 2020 and 2021 are now showing up sicker and with more complex conditions now. Another piece is AI-assisted billing optimization, which is huge. It’s what everyone’s talking about right now, is how do you put this into practice? How do you put this into your revenue cycle? Well, new AI platforms are helping provider systems optimize their billing, which is adding more pressure on claim costs at the employer level. So, there’s just a lot of compounding math to this. But it’s not going anywhere. And there’s a way to get ahead of it, which is we got to start looking at how we break this apart and your benefits, which is where you’re paying everything from.

Kelly: Wow. Those are some big numbers there. So, when you talk about having a benefit strategy versus just buying insurance, what is the actual difference? And what does a real strategy look like?

James: Absolutely. So, this is kind of a fun conversation. When I talk to a lot of leaders or executives, a lot of people have this misunderstanding that when you’re buying insurance, you’re just choosing between which insurance company that you want to have, like a Cigna or an Aetna or a United Healthcare, right? And like, “Oh, we switched, and now we must save money.” Well, maybe it did. But that has actually zero to do [laughter] with how you build a strategy for optimizing your spend. A big point I want to make here is you may not know this, but someone, usually on your CFO or your CHRO, would probably know this.

But there’s really two ways that most companies buy insurance. It’s usually called fully insured or level funding. Both of those methods, what that really means for you as the employer is you’re basically paying a prepayment. You’re prepaying every month that premium. You’re paying the carrier money ahead of whatever claims come in from your people that year. So, you’re always spending money first before you kind of see what the total bill is for yourself at the end of the year. And then you kind of add it up and see where you’re at. The problem with that model is that the insurance company takes every amount of savings that they had. And if you were healthy that year, let’s say you didn’t have that many claims come in, but you still paid a lot of premium, there’s a surplus there. There’s a gap. You pay more premium than you needed to take out. The insurance company keeps that. They don’t give it back to you. All that profit goes to them. Same with pharmacy, if you were able to not spend a lot on pharmacy, if you found different prescriptions that were less cost, and there’s rebates involved in all that, the insurance company gets to keep that with their PBM partner. You get nothing.

So, if you’re a hospital CFO, you probably might know this, but what we call an option door number three is alternative funding. And what that really means is that it’s the first step of leaving that system we just described and getting to a different place where you don’t pay premiums right away. You only pay when you have claims. And you get to see every piece of data that you have. Under door one and two, the insurance company isn’t sharing that information with you. If you’re level funded, they’ll send you monthly total dollar amounts of claims dollars for pharmacy and medical that you spent. But that’s it. It’s very surface-level.

You have no idea what’s happening with your people. You don’t know if they’re healthy or if they’re not. You don’t know what they really need. You don’t know anything. They don’t tell you that. But under alternative funding, you get to have lots of different options in what you can see, how you can measure stuff. And this is the beginning of how you start tackling this big problem that we’re talking about today, because now we can break apart dollars that that made up the whole before and start optimizing each piece. And what I mean by that is you can optimize, for example, your pharmacy. You can get a different PBM that costs half as much. You can find drugs that work just as well for half as much. You can get all the rebates from those. All that surplus goes back to you, the employer. That’s one example. There’s stop-loss insurance that is baked into your premium. You can carve that out, and you can get a much more competitive version of stop-loss. So, it saves you a lot of money there. The TPAs you work with are less expensive than the carrier that managed that for you before. The other last piece, which we’ll get into in a little bit, is population health management programs. Everything from preventative wellness to more complex chronic conditions, with maybe cancer, for example. We can build and have customized health programs for your specific people that lower the cost of care, give them better quality of care, which in return reduces your risk. This is huge risk mitigation right now that I’m talking about, which then lowers your cost for insurance and your premium. So, it comes full circle, and it actually impacts your health system if you’re a healthcare CFO too. This actually helps you on that front as well. But this is stuff that you can’t do if you’re under option one and two. And that’s the biggest misconception that I hear when I talk to executives is, “We got to go a little bit deeper, guys. It doesn’t work that easy.” And we’re breaking out a lot of topics today, but this is the beginning of how you start to look at a real strategy to lower your costs and really take care of your people.

Kelly: Yeah, I mean, you’re blowing my mind right now, really, James, with that option. I’m like, “I want door number three,” right? [laughter] It seems like everybody should want door number three.

James: You should want door number three. Yeah.

Kelly: Yeah, exactly. It makes sense. So, for the hospital CFOs listening who are already self-funded, is this conversation still relevant to them, or have they already solved this problem?

James: It’s 100% still relevant because even if you’re self-funded– and you likely are, if you’re not, then we have a problem already. [laughter] But there’s a whole spectrum of what alternative funding can be, right? You may have heard some of these before. There’s these things called captives, right? Captives are basically you’re a member of could be hundreds, if not thousands of companies that are in this captive, but because of the membership and the volume and the purchasing power, you’re able to get and negotiate better rates for your pharmacy, better rates for your medical, better stop-loss. And just through that mechanism, you can lower your cost. So maybe some of you listening are in a captive. You don’t have to be in a captive. You can do bits and pieces of this. You can basically rent a provider network, whether you want to use Cignas or Aetnas or United Healths or whoever that you work with. You can rent their network. You can have your own PBM pharmacy program. You can have your own stop-loss program. You can piecemeal this stuff together to make up your own strategy is the thing here. So, the key is if you already are self-funded, you want to be looking at all these components, population health programs for sure. After you do pharmacy and stop-loss, that’s the next thing you want to look at because you want to start looking at, do we have wellness prevention, preventative health programs? Are we having company contests and incentives to help employees take care of their health? They could be gift cards. They could be giveaways. There could be iPads, whatever it is, but are we throwing some fun things in the mix for our culture to incentivize people to go get an annual physical, go get your blood tested, go get your check in your cholesterol and your BMI and just go get checked up to see what all those numbers are and just make sure you’re good. Just by doing that because you’re doing preventative wellness and medicine, it’s going to catch anything serious earlier, right? People have problems with health because they waited too long to know that they had a problem, right? So, if you just do that, you’re already mitigating risk for your company and for your people.

And guess what? Not only that, but there’s other programs that that come into play once you go alternative funding. You can have maternity programs. You can have cancer programs. You can have whatever, you name it. You can you can have all these specialized complex programs that provide even more access and more care, better care to the top doctors in the country that you may not have gotten through your regular insurance product that you had before. So, you want to look as a CFO at all these things to be like, where can we optimize? How are things performing, and baseline that every year. And there’s going to be a place where you can shop that out and maybe get better pricing, renegotiate, talk to your broker, ask your broker questions of like, how else can we better our people? Where can we give them more value? Where can we cut costs? It’s got to be an annual strategic conversation just as much as it is about how we’re going to grow revenue in our company and how we’re going to grow our profits and make people happy. It fits in that conversation.

Kelly: Definitely. Yeah, that makes a ton of sense. I mean, I’m not really hearing any downside to door number three, to be honest.

James: Well, it’s wild because this alternative funding conversation, it’s been around, but it’s only getting louder because of the data, because of what we all know to be true. It’s healthcare costs are exponentially growing. It’s out of control. Pharmacy is out of control. It’s outpacing GDP and wage growth. So, you got to deal with it, right? If you don’t deal with it now, it’s going to be worse than later, right? So, if you don’t deal– if you don’t deal with it now, it’s going to be harder for you to deal with this later. Might as well get ahead of it and start having some really tough strategic conversations and maybe you don’t understand some of this stuff. It’s okay. It’s time to learn because this is stuff that’s going to help you guys run your businesses better.

Kelly: Yeah, no, I completely agree. So, you mentioned population health as a risk mitigation strategy. What does that actually mean in practice, and what should a CFO be looking for in their current program?

James: So, population health is not necessarily a wellness perk. It really is a risk management strategy. You base, like I said a little bit before, you baseline your population. You can identify where your risk is concentrated and build programs that intervene before that risk becomes a catastrophic claim. And if you’ve been watching your insurance over the last few years as an employer, as a leader, you know this to be true because it only takes one, right? It only takes one or two people that have a huge accident. It could be cancer. It could be some catastrophic claim that blew through your stop loss, right? And then, the insurance carrier flagged that and they’re like, “Okay, well, we’re going to raise your rates next year.” A lot, maybe. And it impacts everybody then, so that’s what I’m talking about, right? Can you prevent that all the time? No, but that’s the whole point of doing preventative population health programs in the first places. The difference between door number one and door number two right, is that’s a vanilla insurance product. It’s not meant for you and necessarily your custom people at your work. It’s just a vanilla product that anyone can get. It doesn’t necessarily cater to your needs at all.

But in Door 3, alternative funding, now with pop health programs, you can do that. We can customize health programs exactly to your people, especially once you do the baseline stuff, once you do the preventative wellness stuff and the checks and make sure you’re driving people there. Because you know just by having people do that, one, you’re going to get more data on your people. You’re going to know exactly how healthy you are when you run year after year. And you’re going to know if there’s– because you’re going to see this in reports, right? You’ll get claims reports coming in, prescription reports coming in from your pharmacy partner, your [stop loss?] partner, like, “Hey, there’s prescriptions for GLPs in here. There’s prescriptions for cancer treatment in here.” You’re going to see this stuff. So, you’re going to know kind of what’s going on with your people. So, if you see that stuff, we can start to build pop health programs around that.

So, for example, let me land the plane. Let’s say someone unfortunately has cancer, right? And they’re diagnosed, and they need to have some really expensive medication and really expensive chemotherapy and treatment and such. There’s programs like Mayo Clinic. We have a partnership with Mayo directly as a broker. We have our partnerships with folks like Mayo where they’ll say, “Hey, send us your employee. We’ll do a concierge service. We’ll fly into Phoenix. We’ll spend a few days with them. We’ll do every test on Earth to see how they’re doing. And we’ll give it a second opinion on what we think they should really do with this.” And we just had a call with them about a week ago. And I mean, there was one example where this employee was diagnosed stage-4 cancer by their local provider, and they were going to recommend serious intensive chemotherapy right away. They went to Mayo for a second opinion, did that whole few day visit. Their recommendation, their findings, “You don’t have cancer at all. In fact, it’s this other stuff that you have because we looked under the cover. We tested everything. You actually have this, this and this. You don’t have cancer.” Yay, right? And by the way, you just saved yourself $200,000 that you would have to pay for chemo and all this other stuff. So, you’re welcome, right?

And that helps the employee, obviously, but it also helps the employer. And so not to mention, when you work with the Mayos of the world, they have the best procedures. They have the best equipment. They come out with new technology that can lower costs of claims even more. So, it’s just you want to have– if I’m the CFO, you want to have your broker and their partnerships and who they have relationships with– I’m talking about here. I’m just using Mayo as an example, but there’s lots of examples like this where if you have the top, top, top doctors with the top programs, you can get access to those through your benefits platform. Not necessarily you have to go through the carrier to get that. You can get through your benefits provider, your broker, because they have all these relationships. You can start to [attack?] cost of care, quality of care, lowering your cost, risk mitigation that way. And that…it’s huge. It can drop your premium cost 20-30%. I mean, it’s a big number.

Kelly: Yeah. No, it sounds like it.

James: It’s a big number. Yeah.

Kelly: Yeah. So, whether someone is a hospital CFO or maybe they’re running a 200-person healthcare services company, what should they actually do with all this really great information? And where do they start?

James: Great question. So, if you’re in the seat where you get hit with a surprise renewal and you didn’t know it was coming, sorry that that happened to you. But the good news is that you don’t have to live that tape-on-repeat-every-year anymore. What you need to do is to start getting proactive. The real message here, Kelly, is we’ve got to start being proactive with this versus reactive. We know the economic status out there. We know the external pressure is upon us as a business with this stuff, and we know it’s not going to change. In fact, it’s probably going to get worse. The storm’s going to get worse.

Kelly: Yeah. Definitely.

James: So, let’s get proactive. And you should start to have these conversations at least six months before your renewal, because you need to start talking strategy and looking into different options at that point. Most employers wait 60 to 90 days and then they’re already behind the gun. I will say in many cases, insurance companies will give the broker the renewal quotes for their employer two to three months out, and that still may happen to you. But my point is don’t wait for that to come in. Have the plans and strategy ahead of that so that when the numbers come in, you know what to do with them versus react to them. Make sense?

Kelly: Right, yeah. Makes a lot of sense.

James: Yeah. So that’s one. Two, ask your broker these three questions. What funding model am I in right now, and have you modeled alternatives for our organization? Who is keeping my pharmacy rebates, and what would it look like to carve out my PBM, if you haven’t done that yet? And three is what data do I have access to about my own population’s health and claims drivers and what am I not seeing? Those are three really powerful questions that you could ask your broker that you should know the answer to that will help you start to think about which lever you should start pulling with your overall strategy with this stuff. Again, you don’t have to do all these programs in one year. In fact, we would recommend you don’t do that. The beauty of going down the alternative funding path of door number three is you can really build a three, five, seven year plan out with this stuff because there are big levers to pull and it actually takes a lot of work to make a program good in each one of the things that we hit on today.

So, you don’t want to do everything all at once. But as you continue to sophisticate your own custom alternative funding benefit program, you’re going to know that you’re tackling cost of care. You’re going to know you’re improving quality of care for your people. You’re giving them better programs and you know for sure you’re reducing your risk and you’re lowering the cost to your company. Which at the end of the day, whether you’re a small company, we could be talking about a couple hundred thousand dollars, which is a big deal. Or if you’re a mid-sized company, like 200, 300, 500 employees, we’re talking a couple million potentially, which is a big deal. And if you’re a 30,000-40,000 employer health system, we’re talking tens of millions. It’s big numbers that impact your budget.

So, think about this set lastly as, benchmark your performance. If you haven’t done repricing and renegotiations with these components in the last two to three years, you better get on it because you’ve already probably lost some money you could have had in your pocket. Make sure you’re at least repricing, rechecking stuff every two to three years, benchmarking it.

And finally, the last thing is make sure that you’re connecting all the things we’re talking about to your talent strategy. Because at the end of the day, I don’t have to tell you this, it’s always competitive to get the right talent in your company. It’s tough to get the right clinicians, the physicians, the senior executives, you name it. It’s tough to get great talent. So, we’ve got to have a great benefits program that keeps our people and attracts people. Work with your talent attraction team, your HR team, whoever that is. Maybe if we save a lot of money, we can put that into wage increases or more comprehensive benefits or executive benefits or whatever. This is a mechanism that can really enrich the quality of your company for your people.

Kelly: That’s really great advice. Thank you, James. And thanks for sharing your insights with us on why hospital CFOs are leaving millions on the table and what the best run health systems are doing differently. And James, if a listener wants to learn more or contact you to discuss this topic further, how best can they do that?

James: Yeah. Hit me up on LinkedIn. I should be easy to find. Just type in James Jacobi. Would love to connect with you there, or jjacoby@hillgroup.com and would love to hear from you and talk with you about strategy.

[music] This concludes today’s episode of The Hospital Finance Podcast. For show notes and additional resources to help you protect and enhance revenue at your hospital, visit besler.holdings/podcasts. The Hospital Finance Podcast is a production of Besler Holdings.

If you have a topic that you’d like us to discuss on The Hospital Finance Podcast or if you’d like to be a guest, drop us a line at contact@besler.holdings.

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