My business plan is due in one week. I’m going to have to make some tough decisions about how to control my region’s healthcare costs. I know I can’t compromise the quality of medical care for our employees and their dependents, but I’ve still got to find about $11 million
Charles Newman finished his dose of cough medicine as he perused the final draft of his business plan for the upcoming fiscal year. He wasn’t sure what was making him feel worse: his winter cold or the intense budgetary pressures he was under. Mr. Newman, a Health Care Manager for Conglomerate, Inc. (CI), was responsible for managing the company’s healthcare costs in the New England region. The overall cost of providing health care to CI’s employees, which the company had been doing since 1943, had become a billion dollar annual expense. In Mr. Newman’s area, which encompassed 20,000 employees and approximately 60,000 covered lives, total healthcare costs last year had exceeded $136 million.
Two years ago, CI, a Fortune-10 Company, had decided to apply budgetary targets to its healthcare cost growth trends, which had been averaging close to 10 percent annually. The company’s current target for healthcare costs was a 0 percent trend, or no growth. In keeping with CI’s decentralized organization structure, each region had to achieve corporate goals.
Mr. Newman’s region had experienced annual inflation rates of 8-10 percent over the past three years. He was not sure how to achieve a flat trend rate, and had spent the past four months researching options. His proposed reimbursement system for both doctors and hospitals was to be based on outcomes of care, rather than just a fee schedule and utilization reviews. This was a radical restructuring of the company’s reimbursement system, and Mr. Newman was concerned about the reaction of the doctors, hospitals, and ultimately, the company’s employees and families—his most immediate customers.
Mr. Newman’s own experience at his physician’s office this past week had been unsettling. His physician, a long-time friend, had seemed overburdened and preoccupied. In passing, he told Mr. Newman that he had laid off two office employees because of declining revenues or, as he put it, “because of those damn HMOs.” While Mr. Newman had been concerned about his physician-friend, he also couldn’t help noticing a new picture on the wall showing his friend standing in front of the new vacation home he had just purchased on Martha’s Vineyard.
CONGLOMERATE’S HEALTHCARE STRATEGY
Conglomerate, Inc. was a publicly-traded company, with revenues exceeding $50 billion. It comprised twelve business units, plus a small corporate office. The company was highly decentralized, with each business unit solely responsible for meeting its annual agreed-upon profit target. CI had over 200,000 U.S. employees distributed in all fifty States. Its corporate headquarters comprised fewer than 300 people.
CI had been involved in providing medical care to its employees since 1910, when . . .
- What factors are leading to health care costs growing at rates of three to four times the CPI? Which of these is Mr. Newman attempting to manage?
- What does it mean that CI views health care as a indirect cost? Why would changing it to a direct cost induce each business unit leader to address cost containment more aggressively?
- What is meant by “outcomes”? How do outcomes in health care parallel similar measures in other industries?
- What approach should Mr. Newman follow? What else should he do to engage rather than alienate the physicians?