How the surgical cost crisis is forcing companies to rethink their benefits strategies

According to the Health Care Cost Institute’s (HCCI) annual Health Care Cost and Utilization report, health care spending rose 20% over the last five years. On top of that, companies today are in the tightest hiring market in recent history, one in which offering a rich benefits package is crucial to attracting top talent.

Pile on a backlog of more than 1 million musculoskeletal (MSK) surgeries that were deferred during the early months of COVID-19, and employers are facing another health care crisis they may not even be considering. McKinsey recently released a study showing that surgical volume has recovered to its 2019 levels and is expected to increase even more in 2022 and 2023 as hospitals work to address pent-up demand.

With surgical volume and costs shooting higher, and with benefits becoming an even more critical component of hiring and retention in the competitive job market, employers simply can’t afford to ignore surgical spend – or the benefit of helping employees contain those costs.

The problem: Massively inefficient surgical spend

The evidence is overwhelming: In a broken insurance system, employers overpay for surgeries, putting their employees at risk to receive low-quality care and unnecessary procedures.

Planned surgeries now account for more than half of employers’ medical spend. MSK spend alone has almost doubled in the last decade, now reaching $20 billion, with no correlation to improved outcomes.

We estimate that self-insured employers spend nearly $250 billion on planned procedures. But is that money well-spent? A 2020 RAND study found that employers and private insurers paid almost 250% of Medicare’s expense for the same services at the same health care facilities. Price variation is also a significant factor and according to the American Association of Hip and Knee Surgeons (AAHKS), the cost of a hip replacement in the US ranges from $30,000 to $112,000. Adding to those costs, some health plans are asking for rate increases up to 70% due to the uncertainty of the pandemic.

More troubling is the hard truth that spending more on surgery doesn’t mean better care or improved outcomes. Substandard care, readmissions, and complications lead to even higher costs. A 2016 Journal of Arthroplasty study found that post-op complications from hip and knee replacements cost an extra $36,000 to $39,000 per patient.

To make matters worse, in this fee-for-service model, employers are throwing money into a deeply inefficient market, one in which it’s estimated that of the 25 million surgical procedures performed annually, more than 7 million, or 29%, are unnecessary.

The fact is, how employers provide and how employees access health care is at a significant juncture. Many of America’s largest companies are now taking health benefits into their own hands to manage rising costs and provide the best programs for their employees – through direct benefits.

How to control surgical spend–before that MSK wave

As employers face cost increases and deferred surgeries while guarding the health of their employees and offering rich benefits, a new business model is necessary. If one doesn’t emerge, the upcoming spend will once again feed the PPO networks and their fee-for-service model, and the story will repeat itself.

Value-based care strategies offer a compelling solution. For example, employers can adopt solutions that offer bundled payments with Centers of Excellence (COE), enhancing care value with lower, fixed prices, and improved and reliable outcomes. Many employers already integrate value-based health care solutions with their benefits offerings: A recent Business Group on Health survey showed that 81% of employers will have at least one condition-specific COE in place in 2021. This is good news, though there’s still room for improvement, since much of the adoption is through carrier-based contracts that still work through the fee-for-service model, which doesn’t address unit costs.

There’s significant proof that bundled payments improve results and save money. The same RAND study that discovered employers paid more than Medicare also found that applying bundled payments to orthopedic and surgical procedures helped avoid 30% of unnecessary surgeries. For those surgeries that were necessary, there was an 80% reduction in readmissions and a savings of 45% per procedure. The study also highlights the benefit to patients, saving them up to $2,400 while also partnering them with quality health care providers.

As the talent market tightens, it’s imperative that employers offer rich benefits packages that promise improved outcomes—but they also can’t afford to do so if the cost model stays the same. Value-based care strategies, including bundled payments and COEs, deliver better results for both employers and the employees they care for. They lower costs AND they actually deliver better care. Now is the time to act, before a million surgeries get on the calendar.

Brent Nicholson is co-founder and chief client officer at Carrum Health.