The Bottom Line:Getting Your Money's Worth

Focus on helping employees be healthy, Michael Porter says, not just on paying for insurance

Famed business-strategy guru Michael Porter has some advice for employers: Stop obsessing about the cost
of employee health care, and start obsessing about the value.

All of the major players in the US health-care system have made "fundamental strategic errors," says Porter, a Harvard Business School professor and author of 17 books. "Yet, in many ways, I am most ­disappointed by employers. Many employers have the mindset that health benefits are a cost, and they have to minimize the cost. Employers should have known that it is not about what is cheapest. It is about value."

Porter and Elizabeth Teisberg, associate professor at the Darden Graduate School of Business at the University of Virginia, have tackled the system's problems in their recently published book, Redefining Health Care: Creating Value-Based Competition on Results (Harvard Business School Press). They believe that the American health-care system lacks enough competition among providers based on their results. Porter talked with PLANSPONSOR about what he thinks is wrong, and how it can be fixed.

"First of all, employers have got to understand that they have had the wrong goal," Porter says, "to reduce benefit costs and shift costs to employees." Ignored are things such as lost productivity and sick time, costs that he says are often far more significant. "[In health care,] the more you try to reduce costs in the short run, the more you drive up costs in the long run by skimping on things like risk assessment and preventative care. Employers need to think in terms of value, not cost." He and Teisberg define value as "patient health outcomes per dollar spent."

However, with costs rising at double-digit rates the past few years, what choice do employers have but to focus on cost?   "The mantra for 15 years has been costs," Porter says. "The panic level just rises and falls with the most recent year's cost increase.   I do not think there will be any controversy about this. There is absolutely enough waste and low-hanging fruit to bring health-cost increases to zero or negative."

While currently in vogue with employers, consumer-directed health plans and health savings accounts are not the great savior, in Porter's eyes. "[They] have become a stealth way of cost-shifting for many companies," he says, although they can be utilized effectively as one part of a broader, value-based strategy. "Consumer-driven health care is one of those things that has got a grain of truth, but it is not anywhere near the full answer. The wrong way to deal with the issue is to punt, and pass along the responsibility to employees. I do not think we should delegate this issue to the consumer. It is too big.

"[The lack of focus on value] ultimately has to do with the kind of competition that has been created in the system," Porter says. "The fundamental problem today is that competition is not about improving the value. It is about dividing the value." When employers ask workers to pay more for health-care benefits, he says, "that is not creating value; that is dividing value." The same is true when a health-care plan focuses on pushing to negotiate lower rates with providers, he adds.

"[The system is set up] so that each party is trying to accumulate bargaining power so it can get a bigger piece of the pie, or make more money," Porter says. It often undermines value, he believes, by resulting in things like restricting services and limiting choice. "We need patients to get better outcomes," he says, "and get those outcomes at a lower cost."

Competition among health-care providers in the United States is simultaneously too broad, too narrow, and too local, Porter says. "Too broad means that competition tends to be between broad-line institutions, such as hospital versus hospital, or hospital versus health plan. Each actor aggregates into bigger, broad-line entities, trying to get more clout," he says. "In health-care delivery, however, breadth of services creates limited value. Value is created medical condition by medical condition."

At the same time, health-care competition is too narrow, organized around discrete services and specialties rather than around integrated "cycles of care," he says. "We need to reward providers for delivering more overall value in addressing the patient's medical condition, as opposed to rewarding them for performing more ­treatments. [For the most part,]" Porter says, "we also still have a very ­­­hospital-centric system where the high-cost hospital setting is the center of the universe, rather than one node in the care cycle."

Finally, the health-care industry "has grown up as a very local industry," Porter says. Decades ago, with less medical technology available, Americans got in the habit of getting treatment at the closest local hospital. However, in a more mobile world with far more sophisticated treatment options, "the local model does not make any sense," he says. "We have a lot of small, stand-alone institutions that are all trying to do a little bit of everything, without the experience and scale to be truly excellent."

"[Employers need to] start thinking about helping employees be healthy, as opposed to attempting to minimize the cost of health benefits," Porter says. Could current trends lead to employers getting out of the health-benefits business altogether? "We see a few companies thinking this way," he says. "However, this is not practical at this time for most companies, because of tax and risk-pooling issues. Also, most companies understand that health benefits are crucial to recruiting, retention, and employee commitment to the company."

Porter cites, as an example of the ­health-driven mindset, companies that have set up onsite medical clinics for employees to minimize lost work time and deliver wellness, preventative care, and disease-management services. "Remember," he says, "that the truly lowest-cost solution is to keep employees healthy."

Employers also should keep close track of their employees' health-care outcomes, Porter says, such as monitoring diabetic workers. "You have to measure how well your employees are doing in terms of their health-care results, compared with all ­benchmarks that you can get your hands on," he says.

The ability to get good benchmarking data remains a challenge for employers, Porter acknowledges. "There is no one place that everybody can go to and get everything they want, but that is very typical in the business world," he says. "Data is not really the constraint. If a company has the right view of the problem and is out looking for creative ideas and best practices for ­encouraging employee health, there are lots and lots of opportunities here."

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