Employers, it’s your health plan: Use that leverage to negotiate lower costs

Every dollar that an employer spends on health coverage is a dollar that is not available for wages or other employee benefits.

“Only so much money is flowing into the system, and we have to divide that money among health care benefits and cash compensation,” said Adam Block, Ph.D., founder and principal of Charm Economics. “The more health care benefits cost, the less we are able to provide in terms of an annual raise. That compounds over time. An additional 2% a year becomes 40% over time. Because compensation compounds over time, this is a big deal.”

Block shared his insights during “How to Increase Employee Wages Without Really Trying” as part of the Imagine360 webinar series on March 23. He documented the steady rise in the cost of U.S. health care, which now accounts for nearly one-fifth of total GDP.

“From an employer’s perspective, this is not a good thing,” he said. “Nothing we have done to date has been particularly effective at reducing that rate of growth. The reason why this rate of growth is problematic is not because we are not getting our value from health care. The issue is that it can’t go on like this forever. Expenses are growing for reasons that we don’t necessarily want them to grow, such as prices increasing without commensurate value increasing.”

Although inflation is partly to blame, there has been a consistent gap between price increases in health care and the overall economy. Health care premiums have risen 114% in the last decade, compared to a GDP growth rate of 17%.

Related: Implementing value-based health care: Key trends shaping 2023

“Medical cost inflation is growing faster than general inflation,” Block said “We expect prices to go up; that’s just how things go. But the issue in health care is that the prices are increasing much more than prices in any other sector.”

Not only that, but the United States spends far more on health care than other developed nations do.

“In 1980, all countries were in about the same place,” he said. “But now the United States is the outlier. The United States historically spends far more on health care than other nations, which theoretically tells us there is something we can do about this. Utilization is the same internationally, so the United States has higher health care costs because of prices.”

Despite the best efforts of government agencies, most of the burden of rising prices falls on the shoulders of employers. “The ball is in employers’ courts,” Block said. “No one is doing this for them.”

For example, health care costs add between $1,500 and $2,000 to the sticker price of every car that General Motors manufactures. And as former Starbucks CEO Howard Schultz said, “We spend more on health care than on coffee.”

As every employer knows, health care is the most expensive benefit they fund. Commercial rates are two or three times those of Medicare, and some employers pay as much as five to eight times Medicare rates. Employees also pay for rising costs in the form of slower wage growth and less-frequent raises.

Part of the solution to increasing employee wages lies in the subtitle of Block’s presentation — “Hint: It’s Your Health Plan.” He encourages employers to use their leverage to negotiate lower costs.

“Employers are the ones who hold the power,” he said. “They are the ones who are writing the checks every month. Many believe they are underutilizing that power, because it’s not their core business. But if employers are working hard toward this, they are going to have more money to spend on wages, and they are going to have a competitive wage advantage.

“So while it is a threat if you don’t do anything, it is an opportunity if you are willing to do something. You can offer higher salaries by controlling health care costs.”