Human Capital & Careers

No Mystery How to Restrain Health Costs

Companies that perform the best in managing health-care costs employ every effective strategy more often than do companies that bear high costs.
David McCannMarch 12, 2018
No Mystery How to Restrain Health Costs

For companies that have been less than successful at holding back runaway increases in health-care costs, here is some clarity on what steps would likely prove to be effective.

A survey of 395 large employers (at least 1,000 employees) by Willis Towers Watson draws an explicit road map for minimizing such cost spikes. To do so, the firm identified 47 “best performers” and 53 “high-cost companies,” defined as follows.

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Best performers are those that displayed all of these characteristics:

  • Two-year average trend in health costs (from 2015-to-2016 and 2016-to-2017), after taking into account the impact of annual plan changes, that was below the national norm (4.5% in 2017).
  • Two-year average trend in health costs, without taking into account the impact of annual plan changes, that was below the national norm (6% in 2017).
  • 2017 efficiency of 5% or greater (or about the 60th percentile and above), with efficiency defined as “cost-plus” adjusted by employee demographics (i.e., taking into account where an employer’s workers are located, given that health-care costs vary dramatically from region to region).

High-cost companies, meanwhile, were roughly the opposite: both spending above the national average and efficiency below that threshold.

The best performers weren’t just better than the high-cost companies with respect to a few key strategies that are known to mitigate cost hikes. They were better at all such strategies.

“Best performers understand there is no single strategy for managing costs and improving the well-being of their workforce,” says Julie Stone, a national health-care  practice leader at Willis Towers Watson. “They evaluate all aspects of their health and well-being benefit strategies and activities, and implement innovative, integrated practices to improve them.”

The consulting firm divided cost-mitigation strategies into three groups. For one, best-performing companies are more proactive with their health-plan designs and policies for subsidizing the cost of workers’ coverage. The chart shows the percentage of companies that have taken the indicated steps:


With respect to the second item in the above chart, “Total Rewards” looks at all of an employer’s spending on employees: base salary, incentive compensation, 401(k) match, health-plan subsidy, and the cost of providing vacations and disability coverage.

“It’s a holistic view,” Stone tells CFO. “If an employer wants to, say, raise its health-care subsidy by 1% and still remain cost-neutral, it can look at where else it might be able to adjust. But some companies are more fragmented and siloed, where they may, for example, look at their budget for benefits completely separately from compensation.”

According to the survey, best-performing employers also do more to encourage and improve workforce well-being, using a variety of approaches:


Finally, best performers are ahead of high-cost companies when it comes to adopting new health-care delivery solutions:


If it’s so clear what strategies are effective at mitigating health-care cost increases, why don’t more companies take them up? In a word, the answer is “culture.”

“The counterbalancing discussion is about the pace of change,” says Stone. “Some organizations are quick and nimble. For others, it takes more time to socialize the workforce and make the case. Some of that is where the financial component of this story falls, relative to things like employee engagement and disruption.”