Monday, January 21, 2008

Focus on Employers

Last Post Review

My last post described the complex scenario of health care business. In summary:

1) The market is more than companies, physicians and patients.

2) Market stakeholders are also health plans, hospitals, government and others described in the post.

3) If you want to have a successful Marketing strategy, your product must deliver a specific value for each stakeholder.

And don’t forget: each stakeholder demands a different value proposition!

My first feedback: According to one of my colleagues, the last post “Creating a Multi-Stakeholder Approach” was very complete but too technical.

I accept the comments and appreciate the frankness. This blog is focused on the strategic-level discussion around health care business and it seems my last post went a little bit out of the scope. I will keep further discussions at a higher level and, if necessary, we can all dive into a certain topic using the comments section or exchanging e-mails. Thank you again!

Employers, the Big Payors

Employers may have the largest stake on the health care business, and that’s because of one single reason: they pay the majority of medical costs. If we take the example of Brazil, employers pay approximately 80% of managed care costs, and finance a significant portion of public health with their tax payments. This is not very different in the U.S.

However, employers are usually one of the less involved in health care discussions. Usually, they don’t realize how much profit (yes, profit) can be made by managing employees’ health. On the other side, few health care companies know how to promote their products to this segment.

But the situation is changing. See this very short list of articles that give real-world examples of the discussion around employers and health care costs.

What Fat Costs America – Forbes; November 8, 2007 (article)
“Obese people miss more work, costing employers something on the order of $4 billion.”

The Public Face of Wal-Mart’s Health Care Program – NY Times; November 13, 2007 (article)

Q: “When you think about solving the American health care crisis what are the roles of an employer like Wal-Mart, the government and the individual worker?”

A: “Clearly, we need to do something differently (…) We believe there is always a role for the employer, as well as the individual and the government. So it’s shared responsibility.”

Judges Tell San Francisco It Can Begin Health Plan – NY Times; January 10 2008 (article)


“The unanimous decision, from a three-judge panel of the United States Court of Appeals for the Ninth Circuit, allows the city to require businesses with more than 20 employees to pay a fee to help cover employees’ health care costs…”

Company Clinics Cut Health Costs – NY Times, January 14, 2007 (article)


“Within the last two years, companies including Toyota, Sprint Nextel, Florida Power and Light, Credit Suisse and Pepsi Bottling Group have opened or expanded on-site clinics(…) Today a new wave of clinics is opening, driven largely by a motive that was less of a factor in the past: employers’ desires to reduce their health insurance premiums by taking care of workers before they need to see outside doctors.”
“A clinic serving a couple thousand employees can probably save $1.5 million to $2 million a year,” said Mr. Beech, a health care specialist at the Watson Wyatt benefits consulting firm.”

Aiming at the Value Proposition

Let’s remember our Income Statement: Revenues (minus) Cost of Goods Sold (equals) Gross Margins.

Gross Margins (minus) Sales, General and Administrative expenses (minus) Depreciation (equals) Earnings Before Tax and Interest, or Operating Profit.

If you still need a cheat sheet, see below:

As a classical approach to increase Profit, you should either increase Revenues or Decrease Costs. Considering that almost all approaches to increase Revenues (enter new markets, target new customers, increase prices, sell more…) demand higher investment in Advertisement and Marketing Campaigns, it is very unlikely that profits will grow as much as sales. You don’t need to be an MBA to reach this conclusion.

That leaves us with the less risky way to increase profits: reduce costs. Let’s see how it applies to our situation.

For instance, your health care company sells a product that reduces length of stay in the hospital by 2 days on average by patient. How much that translates into value for employers?

Benefit: less 2 days of LOS
$ Benefit: Cost-savings of $200 (each day in the hospital is around $100)

Company XPO has 1,000 employees that could benefit from this product in one year

Potential cost-savings: 1,000 emp x $200 = $200,000
And by the way, that benefit goes directly into the Operating Profit

Now the final question: How much more sales (units or $) should Company XPO make in order to reach the same increase in Operating Profits?

Suddenly, your product can be a terrific asset for a company looking forward to improving its bottom line. Your value proposition for employers should then be divided into two parts:

Part 1: “My product can help Company XPO reduce medical costs by $200,000 in one year, thus increasing Operating Profits.”

Part 2: “If Company XPO would like to see the same result, they would have to increase sales by (%, more units, more $...)”

The Invisible Impact

So far, we have been discussing the “Direct Costs”. These are the actual visible costs that companies can assess by checking claims and bills. But Direct Costs are far from being the end of the story.

In 2006 the Thomson Corporation estimated that Migraine Headaches cost U.S. employers more than $24 Billions annually (see the article here). Of these $24B costs, slightly more than 50% were due to Indirect Costs. These hidden costs can be divided into Absenteeism and Presenteeism.

Absenteeism is the absence of a worker from his job, in our case due to a medical condition. It can be easily translated into costs by multiplying the worker’s hourly wage by the number of hours he is absent from work. The final number will represent how much the company is investing in an employee while getting no return form his work.

John’s hourly wage is $30

John has been absent for two days: 2 days x 8 hours/day of work x $30

Total Absenteeism cost of $480. In other words, the company lost $480 since John didn’t work or produce anything during those 2 days

Remember the case about Company XPO above. Do the math: $480 absenteeism cost/employee multiplied by 1,000 employees…Much more than the Direct Costs we calculated!

Presenteeism happens when employees are working in spite of medical problems. The concept is very straightforward: if you have an employee feeling pain or any other kind of discomfort, he or she won’t be able to concentrate and, thus, will produce less than expected. Healthier employees work faster and more productively.

There are several ways to calculate Presenteeism, and I strongly recommend only two approaches:

1) Speak with your target employer. Ask if he understands the Presenteeism costs related with the condition and discuss ways to measure it.

2) If the first approach doesn’t work, look for published papers for relevant data.


Step 1: See how much Direct Cost savings your product can generate for a certain employer. The most challenging part will be to get the employer’s cost structure.

Step 2: After you get the numbers, assess the benefits of reducing Indirect Costs. Don’t forget to break it down into Presenteeism and Absenteeism.

Step 3: It is always a good idea to see how much familiar the employer is with the concept of Direct/Indirect Costs before demonstrating your results.

There is much more I’d like to describe and discuss, but I must refrain this blog to a strategic discussion. However, feel free to contact me for any other information you would like to share or receive in regards to employers.

Before I finish this post, I want to provoke you with a question:

“Since the average U.S. employee stays at job for only 4.5 years, is it enough time for companies reap the benefits of investing in their employees’ health?”

Let me know your thoughts. My answer will come with the next post.

May we all improve our value propositions for our clients!

Look forward to hearing from you,

Ernesto M. Nogueira

No comments: