Human Capital & Careers

A Prescription for Cutting Health-Care Costs

The finance chief of Cardinal Health says there is plenty the private sector can do to bring health-care spending under control.
Alix StuartMarch 10, 2010

Jeff Henderson, CFO of Cardinal Health, may not know the future of health-care reform in the United States, but he is sure about what is needed.

“The really big issue that will dictate whether health-care reform happens or not is…whether it helps get health-care costs under control,” the finance chief of the $96 billion health-care supply-chain management company told a group of finance executives Tuesday at the CFO Rising conference in Orlando.

To be sure, health-care reform legislation could have positive effects for Cardinal, which cites “improving the cost-effectiveness of health care” as its primary mission. The company manages supply chains for pharmacies, hospitals, and other health-care providers, helping them rationalize suppliers and get the best price for supplies, among other things. That business model “thrives on volumes,” said Henderson, volumes that would likely increase if federal legislation makes more people eligible for health-care services.

However, Henderson suggested that many improvements could be made by the private sector even in the absence of a federal mandate. “I’m not sure legislation is necessary, but change is necessary,” he said.

Acknowledging that some of the increase in health-care costs is due to relatively uncontrollable trends, such as medical innovation and the aging and increasing longevity of the population, Henderson pointed to a number of areas of preventable waste. Those include the fragmented purchasing habits of many medical facilities and the lack of incentives for medical care to be cost-effective.

“If we were all running companies the way health care is being run in this country, we wouldn’t have jobs,” he said. “I don’t think the fundamental issues of removing waste and aligning incentives are unsolvable — we’ve figured out how to do that in nearly every industry in America.”

Although tort reform has not been widely discussed in the politicians’ proposals, Henderson sees changes in medical-malpractice laws as one way to take some costs out of the system. “I have no doubt that every day procedures are being performed to avoid lawsuits. That’s waste, the classic definition of it,” he said.

Henderson also outlined the steps he is taking at his own company to contain employee health-care costs. His two key initiatives: “aggressively” steering employees toward consumer-directed health-care plans and implementing wellness programs that include onsite gyms and pharmacies.

“The net of both of them is a pretty material difference in health-care costs,” said Henderson, noting the company now pays an average of $500 less per employee than the national average as calculated by Hewitt. He said health-care cost increases at the company have been low compared with the national average of 7% or 8% during the past few years.

The shift to consumer-directed health-care plans generally doesn’t come without controversy, though, as they typically require more out-of-pocket spending by employees. Indeed, Henderson said he nixed the company’s original plan to “go cold turkey” from traditional to consumer-directed plans because of pushback “not only from rank-and-file employees, but from some of the executives as well.” Instead, Cardinal is offering progressively sweeter incentives for people to sign up for the consumer-choice plans, and progressively less help for those who want to stay with what they know. “If people really want to stay in a traditional plan, they can, but it’s going to be increasingly relatively expensive to do so,” said Henderson.

Ultimately, he expects all employees to convert over, as many who have already signed up are generally pleased with their choice. “We may have some advantage in being a health-care company, but we’re not doing anything that any other company in the world couldn’t do” when it comes to managing employee health-care costs, he said.