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5 Mistakes CFOs Make on Healthcare

Which sounds worse: getting shortchanged by a cashier at the grocery store or losing your life savings to a Bernie Madoff-type investment?The answer is obvious. Still, it’s a good metaphor for how to manage your healthcare investment and, more importantly, the glaring flaws in how healthcare is administered and delivered.

First, some background. The Employee Retirement Income Security Act of 1974 (ERISA) was designed to protect employee benefits, including health plans. The person exercising authority over a health plan is a “fiduciary” and legally bound to act in the best interests of the participants.

But, according to a recent article, chief financial officers (CFOs) are facing millions of dollars in personal liability suits due to a lack of “fiduciary oversight.” Whether the cause is negligence, omission or imprudent management, the result isn’t good: a potential lawsuit for the company and executive, mishandled or wasted money and shortchanged employees. Throw the Department of Labor into the mix (it’s been keeping a close eye on 401k plan fiduciaries in recent years), and the choice is cut-and-dried: Most companies need to up their game.

See also: A Way to Reduce Healthcare Costs  

Here are the five biggest mistakes CFOs make when designing, purchasing and managing their health plans.

1. Taking a gamble.

CFOs of middle-market companies are gambling with the organization’s healthcare by taking 19 to 125 times more risk than they should. Why would any organization risk $500,000 or $1 million when it can reduce exposure to less than $8,000?

It’s even more shocking at large companies when the bottom line is exposed to unnecessary healthcare overspending. Healthcare managers wager millions of dollars by ignoring reducible risk, and the mistakes hurt the bottom line. C-suite executives are surprised when I explain why “best practices” don’t work—until I show how many millions of dollars are trapped inside their healthcare budget.

2. Surrendering responsibility to unqualified departments and managers who don’t have P&Ls.

I always ask CFOs one simple question: “By a show of hands, who would hire a HR-level executive to lead a $100 million division of your company?” No CFO has ever raised a hand.

Yet the company’s healthcare investment is often treated as an operating expense that’s delegated to operations managers who don’t have the time or expertise to make the best-informed decisions. Too often, these decisions end up in the hands of consultants who, most often, will take a boilerplate path of least resistance by recommending “best practices” that only major in minor outcomes.

3. Not all healthcare costs are created equal.

For many, health-plan management falls outside standard business supply chain cost-control strategies. So, shift perspectives: Negotiate the highest utility for every dollar invested in the healthcare supply chain. Hospitals, outpatient surgery centers, physicians and pharmacy account for more than 90% of claims, and all can be negotiated. Successful cost reductions must focus on four areas: wasteful spending, excessive fees, poor quality and non-transparent pricing.

Who in his right mind would shop at a grocery store and fill up two carts, then leave knowing he’ll receive a bill 30 days later and only then be told how much everything costs? Well, that’s how most healthcare works.

4. Not involving senior executives.

I always ask CFOs: “Which two ‘best practices’ are most effective in reducing the frequency and severity of your claims this year?” The CFO soon realizes that, despite a legacy of best practices, there has been negligible improvement, with millions left on the table.

The CFO must be directly involved and recognize that healthcare investment is a capital allocation strategy—it requires the supervision of an executive with P&L responsibility.

5. Not knowing what you’re paying for.

Most CFOs don’t know whether their company’s medical plan pays retail, wholesale or institutional charges. Like with a 401k, it’s a CFO’s fiduciary responsibility to know the healthcare broker’s and consultant’s total compensation.

It’s imperative to ask the right questions to uncover where your dollars are going. Familiarize yourself with fees, commissions, bonuses, overrides, incentives, profit sharing, contingent fees, expense reimbursement allowances or performance-based compensation—because they all add up.

See also: Healthcare Debate Misses Key Point  

Being uninformed can cost your company a lot of money, or worse. When explaining in court that you consistently supervised and overpaid by as much as 10x for a poor-performing, low-quality medical plan, ignorance is no defense.

So there you have it: five common mistakes to avoid when buying healthcare. Take ownership, talk to an expert and educate yourself on sourcing the best solution for your company. You really can’t afford not to.

10 Rules for CFOs, From the Fog of War

The fog of war can be an excellent metaphor for the CFO in today’s rapidly changing business environment. Nowhere is change more frantic than trying to manage multiple financial battlefronts: profit margins, SG&A, FP&A, EBITDA and free cash flow. One of the largest battles in business today is the war between organizations and the healthcare supply chain that their employees and team members access for medical treatment.

Investing millions of dollars in accessing the healthcare supply chain without actually knowing in advance the cost of almost all the services might as well be war, because it darn sure kills the income statements of companies and the standard of living for employees and families across America.

See also: Where Are All Our Thought Leaders?  

The recently released book titled “Extreme Ownership” delivers a how-to on managing multiple simultaneous risks across the organization. The lessons in the book provide a strategy outline on how to execute and eliminate risk when you have leaders and team members operating in hostile environments.

For instance, ask your internal healthcare manager what the mission of your healthcare program is and see if it matches your goals and intentions. Have you communicated to the healthcare manager and his operations team the “why” of the investment in healthcare, or is health care just OpEx?

As hard as it is to believe, some organizations allow non-P&L managers, or worse, operations-level administrators to dictate policy and strategy, and their decision supersedes the mission.

The annual renewal process can be very reactive, and not enough effort is applied to identifying priorities. The result is the equivalent of friendly fire because the tactical plan focuses on the wrong targets and has minor impact. The enemy, the healthcare supply chain, reverse-engineers every government regulation change and cost-shifts to private employers. Not understanding this fundamental principle loses you the war in the long run and the battle every renewal.

CFOs need to make sure they are not in a position where they are merely informed and not actually involved in healthcare strategy, because they will have limited situational awareness. Is there a formal process in place that requires the operations level staff to report all strategic and tactical options up to the C-suite and not just cherry pick what is disclosed? Is innovation preached but status quo and incrementalism actually reinforced? Are rate increases tolerated because they are lower than budgeted increases? CFOs need to honestly assess whether they abdicate their leadership role by avoiding the forced execution of strategic healthcare options, instead choosing to take the path of least resistance and defaulting to the ground forces that you pay to handle the details.

After all that, is the question ever asked, “What is the best way to execute the mission?”

Failed execution and badly supervised risk management can lose an organization millions of dollars, and now CFOs risk personal liability by not knowing the best way to execute the mission. There is a consequence for gambling with employee contributions in an ERISA plan, and not knowing with certainty that the organization’s healthcare claims will go down this year is the proof.

See also: A Simple Model to Assess Insurtechs  

CFOs have limited situational awareness of the unnecessary risks and poorly performing strategies being deployed by the people they believe they are paying to manage their healthcare investment. The C-suite must gain a new situational awareness of the healthcare budget risks, and ERISA compliance exposure facing the organization and potentially themselves individually.

My book notes that soldiers died because of mistakes. In business, healthcare strategy mistakes crush the employees’ standard of living, waste millions in lost profits and expose the CFO to fiduciary risk because of a lack of situational awareness, the conviction of forced execution and extreme ownership.

To See Healthcare’s Future, Look at Cable

The great unbundling is coming to the cable industry. For decades, the cable providers transformed the television industry, first as a substitute, and then ultimately as the disruptive force behind the demise of free television viewing. Since the 1990s, bundled packages have become the pervasive force in delivering movies, live sports and music. The cable industry, with the help of armed lobbyists, has changed the way local channels broadcast. The number of channels has skyrocketed as the way content was sold and programming was distributed resulted in vast volumes of content to sell. Bundles were created to package less popular and rarely watched content with popular programming. Size was a proxy for quality, and bigger was marketed as better. The business model has worked for decades.

Pre-Paid Bundled Pricing: a Dying Business Model

Subscribers of bundled cable receive hundreds of channels even though industry research finds that the typical viewer only watches 17 channels. Forget that they have hundreds of channels they don’t view. How many subscribers, in fact, don’t even know what they pay for in their bundle? As the internet has expanded in depth and breadth of services, wireless connectivity has become ubiquitous. Mobile smartphone technology is growing globally at exponential rates. People can watch video on their phones without a second thought.

Consequently, more people are demanding that they only pay for what they actually watch. Why pay for more than you use? And now you don’t even require a television to watch pay TV. Today, an internet connection means you can watch almost anything online. Websites like Netflix, Apple, Hulu, Amazon, YouTube and a growing list of new entrants are forcing change on the cable industry. The cable industry could see this new force and demand coming for years, but with typical stuck-in-the- past leaders, the industry has mostly chosen to lobby for anti-competitive legislation and incremental, slow change. The beginning of the end has already started for the old cable industry.

See also: To Bundle or Not to Bundle?

The writing is on the wall, and the industry players don’t like it one bit. Unbundling is here to stay. Pay-TV subscriptions are falling, and the rate of disconnect is increasing. Simultaneously, the rate of unplugged nontraditional non-subscribers is growing annually. The industry refers to the people who cancel their connections as “cord cutters”: and the people who have never subscribed as “cord-nevers’

Healthcare Is Unbundling Because Buyers Demand Change

Just as millennials, the internet and mobile devices are changing the cable TV industry, healthcare is being changed by the ACA, self-funded employers and a legislative shift to value pricing. Think about the parallels with the healthcare industry where the key players dictate terms and pricing, bundling unnecessary and ineffective care and then charging fees based on the volume of treatments with little or no transparency. Disrupting the status quo is already here; it’s just not evenly distributed – yet.

The healthcare buyers of today and tomorrow are controlling their costs and experience by flexing their demand muscles in local and regional markets around the country. Enrollment in prepaid fully insured health plans is dropping annually as employers learn about the advantages of self-funded pricing, taxes and cost of claims.

The most successful business purchasers of healthcare are predictably and measurably saving 30% to 50% off the standard provider-driven pricing. By focusing on the elimination and reduction of claims, smart health buyers are slashing hospital, surgical center, pharmacy, physician and ancillary expenses by double digits. Some of the tools have been successfully implemented for a decade and only now are gaining attention. Solutions like RBP, SIHRA, DPC, 100% audits, PBM re-contracting, fixed-fee bundled pricing, medical necessity, coordinated care, COEs and many more are saving organizations millions of dollars and changing the experience of health buyers, patients and providers.

See also: Ready for a New Consumer Channel?

Unlike the solution providers changing the cable TV industry with national virtual footprints, the healthcare industry is being disintermediated in local and regional markets. Because healthcare is 20% of the economy, reducing healthcare costs by billions barely registers on the meter, as hard as that is to believe,  but the results are enormous for employers creating EBITDA from healthcare.

Follow the smart money. Healthcare is an experience where every encounter with a patient is a market of one and the buyer is becoming aware of his power in this transaction with the healthcare supply chain. Other industries have recognized the efficiency and pricing economies that come with managing the supply chain because demand is elastic. Think how WalMart has changed inventory controls and Amazon has changed “last mile” logistics, to name a few.

Healthcare buyers can now negotiate, force transparency and control the cost of care. The cost of inaction and taking the path of least resistance will place your company in an uncompetitive position. Self-funded employers need to change because your employees’ financial well-being is ruined by the health care cost shift. The healthcare industry will never be the same.

#1 Affliction Costing Businesses Billions

Preserving the status quo (PTSQ) is repeatedly the cause of lost revenue, missed opportunities and even bankruptcies. The pace of innovation and change in business is accelerating at an ever-faster pace. Organizations with good leadership decide to move forward scared, rather than remain frozen with fear.

Recently, I had the pleasure of spending the day with Peter Diamandis, the founder of X Prize Foundation and the best-selling author of Abundance and BOLD. Diamandis was named by Fortune as one of  “The World’s 50 Greatest Leaders.” He spoke about why we are living in a world of abundance and about how to recognize the future direction of technology and business opportunities. All of his examples and stories were directed at educating the audience on how to stay ahead of the competition and how to create disruptive innovation in any industry. (And, did I mention he graduated from medical school and has very strong opinions about the future direction of medicine? I’ll save those comments for another day.)

See also: 10 Reasons Why Healthcare Varies

His talk on the “6 D’s of Exponentials” was exceptional. It’s a way of thinking about how exponential technologies are affecting our world. He proceeded to describe business examples in robotics, artificial intelligence, 3-D printing, biotechnology, self-driving cars, space exploration and medicine.

So, how is it, in the face of exponentially increasing change and all this business opportunity, that managing healthcare for so many organizations represents a slow, linear decision-making process characterized by rigid thinking, detached leadership and high costs? Even more confounding is that many corporate C-suites have abdicated responsibility of a multimillion-dollar division (healthcare) to internal managers who inadvertently make the problem worse each year. The typical corporate culture talks about innovation, but it only reinforces and encourages business as usual and the preservation of the status quo.

Business as Usual, No Disruption Here

For the majority of mid-sized organizations, healthcare is “managed” as one of the largest operational expenses on the balance sheet —instead of as a strategic asset that delivers a sustainable competitive advantage. Continuing to manage healthcare as an expense while somehow expecting a different result will continue to be costly.

If you don’t disrupt your business practices, then someone will disrupt you. A study from the John M. Olin School of Business at Washington University estimates that 40% of companies in today’s S&P 500 will not exist in 10 years.

The world of healthcare is changing rapidly. The Affordable Care Act was merely a catalyst that has triggered a tsunami of endless change in the future of healthcare in America. The challenge is to recognize new opportunities and to implement them effectively.

In PwC’s latest CEO study, almost 75% of those surveyed said they are concerned their companies lack the skills needed to meet future competition.

Think about all the job duties, responsibilities and competing demands a typical healthcare manager experiences. These day-to-day competing priorities mean a manager must focus time and energy on eliminating the tallest fire first, regardless of the schedule, all while managing the second-largest capital allocation for the organization: healthcare. Is it any wonder that incrementalism, fear of change and choosing the path of least resistance run rampant in corporate America?

See also: Healthcare at the Tipping Point

The C-suite needs to get involved and apply its business finance skills to healthcare. The C-suite must wake up to the fact that linear thinking — like the illusion that vendor size creates market leverage in healthcare — is as outdated as flip phones and fully insured insurers who refuse to substantiate annual billing and rate increases with financial transparency.

According to an AON/Hewitt Survey of more than 1,000 companies, 77% of respondents said the actions of their peers influence their organization’s healthcare strategy. Comparing your results with other organizations trapped by the same poor outcomes of legacy best practices and groupthink is like listening for an echo and expecting a different answer. The survey results should make the C-suite sheepish.

If you’re a CEO or CFO, you have to ask yourself these questions: With all the evidence about increasing change in business, do you honestly believe managing healthcare to preserve the status quo is the prudent thing to do? Can your organization’s stakeholders afford the cost of doing nothing?

10 Reasons Why Healthcare Varies

Imagine your recommended medical treatment came with this warning label: “Your results may vary. Your results are not guaranteed. Outcomes can include preventable complications, up to (and including) hospital-acquired infections, hospital readmission and premature death.”

Caveat emptor or, “buyer beware,” has never been truer than in today’s healthcare system.

The use of evidence-based medicine) protocols delivers higher quality, lower prices and improved outcomes throughout the country for many different treatments. Scientific studies have proven the efficacy of following best-practice guidelines. Achievable results include reduced premature mortality, improved quality of life and better clinical outcomes, which means faster recovery.

See Also: Cutting Healthcare Costs Doesn’t Lower Quality

By no means is this a blanket assertion that the practice of all medicine can be reduced to a checklist, a differential diagnosis and a universal treatment regimen. The seven billion human beings on this planet each have trillions of cells and billions of possible variations. In addition, there are many social determinants of health, including social, economic and physical environmental factors.

The fact is, no treatment regimen works 100% of the time on 100% of the people.

However, there are proven, evidence-based strategies that effectively deliver higher quality and better outcomes with scale (which means lower costs). Therefore, it is incumbent upon healthcare providers and purchasers to live up to their fiduciary responsibility to act in the best interest of the consumer and the insured employee.

So, what happens in the practice of medicine that results in so much variability in treatment?

Today’s medicine is part science and part art. Unfortunately, for too many years, perverse reimbursement incentives have clouded and conflicted an industry that requires incredibly nuanced judgment on conditions with many variables and possible outcomes.

Outcomes are largely determined by the skill and experience of a physician or team of physicians. Parity may exist in professional sports, but that is not the case in the practice of medicine.

As a result, the practice of medicine is significantly influenced by individual providers and their practice patterns, beliefs, biases, needs and preferences, what we call “10 Reasons Why Medical Quality, Price and Outcomes May Vary.”

See Also: Healthcare Costs: We’ve Had Enough!

Depending on your location, your level of engagement and your particular treatment, the quality, price and outcome are likely to be affected by the actual provider of services. The following list includes 10 reasons why the practice of medicine is driven by the attitude, behavior and skill of the provider:

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The typical American healthcare consumer still believes he is a patient and acts accordingly to eliminate the illness, not always recognizing the role he plays in his outcomes. The irreversible change taking place is that individuals have to learn to become consumers of healthcare by becoming engaged and taking responsibility for both their life outside the medical system and the choices they make when accessing medical care. The risks are real.

Understanding the risk can empower recognition and awareness that acting like a consumer is in your best interest, and that might just save your life. For additional free assistance on avoiding wasteful, unnecessary or poor quality medical tests, treatments or procedures go to www.choosingwisely.org.