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The Rise of Healthcare Costs in Manufacturing: It’s Not IF You’re Losing Money, It’s How Much

Mar 19, 2020 9:00:00 AM

Here’s a hard truth for most manufacturing firms. You’re not managing the supply chain when it comes to your employees’ benefits, which means you’re losing money. The question is not if you’re losing money in your health plan. It is, how much are you losing?

Rise of Healthcare Costs

A key problem facing manufacturing firms is the uncontrollable and unsustainable rise of healthcare costs. If insurance was the source of this problem, we could fix it with insurance. You've tried to do that at your manufacturing company for 20, 30, 40 years. We're here to tell you that the insurance is not the problem and it's not the solution.

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Healthcare consulting firm and independent actuary, Milliman, has studied how employers spend money under any form of benefit plan. What they found was, 20 percent of the plan cost is a fixed expense, such as plan administration fees. The other 80 percent is variable. It changes depending on what you are buying with health insurance, what kind of procedures and claims you are accumulating.

When we ask manufacturers what they’re doing to control the 80 percent of their variable expenses accounting for the rise of healthcare costs and they do not have an answer. Milliman finds that of the 80% of claims costs that are variable, 96 percent comes from four verticals in the healthcare supply chain:

  1. Inpatient (31%),
  2. Professional Services (29%),
  3. Outpatient (19%),
  4. and Pharmacy (17%).

To save the most money while disrupting the least amount of people, DCW Group advises manufacturers to address the four verticals in this order, reshaping their health plans to incur the greatest amount of savings from each area and slow the rise of healthcare costs:

Prescription drug cost-saving does not require employees to change what drugs they get or where they get them filled. With no disruption to your workforce, we start by taking prescription drug rebates away from the insurance company and returning them to you, the employer.

In one real-life example, taking a manufacturer’s plan to an independent pharmacy benefit manager alone would result in a $52,305 savings. If this company operates on a 10 percent profit margin, they would have to do $523,000 in new business sales to add that kind of money to their bottom line.

In the next bucket, inpatient claims, a typical plan will only see about six to 10 out of 100 people submit a claim in this category a year. However, these big-ticket claims — surgeries, transplants, etc. — account for nearly one-third (31%) of annual plan costs. It is a huge cost and a huge contributor to the rise of healthcare costs. The good news is, making cost-saving changes will only disrupt a handful of people.

Start with the pre-certification process. If the carrier is doing it for you, they approve everything that is in-network. Employees going to a $100,000 facility when there is a $20,000 option available? It doesn’t matter to them. Instead, driving members to a center of excellence and waiving the employee share of the expense incentivizes optimal use of the health plan.

There are more claims in the outpatient sector, but these still come from a small subset of plan participants. Even so, there are moves your manufacturing firm can make for cost-saving to be a reality here as well, such as scheduling a knee surgery in a less costly and more efficient outpatient facility versus a traditional inpatient hospital.

Professional Services
Professional Services are somewhat unique in that they comprise a large chunk of expenses (29%) but consist of relatively low-dollar claims. Even in an emergency room setting, a claim of a few thousand dollars pales in comparison to a $45,000 hip replacement.

Out of a group of 100, at least half are going to go in for an office visit throughout the year. If you’re doing a good job of promoting the fact that annual physicals are, for the most part, free to plan participants, you'd love to see everyone go in at least once a year. That said, there are a lot of less expensive options. One is to institute direct primary care, where you carve certain services out of the medical plan entirely and then pay a flat fee to the doctor to perform an unlimited number of those services for the set fee.


For more information on the steps your manufacturing firm can take today to improve and free up the cash flow necessary to fuel rapid growth, download your free copy of DCW Group’s Ebook, Funding Growth: A Comprehensive Overview of 6 Strategies Leading Manufacturers Often Implement.

Funding Growth

Robert Gearhart
Written by Robert Gearhart

BOB GEARHART JR. is the CEO of DCW Group and responsible for helping its clients better manage the healthcare supply chain - to improve benefits and increase earnings.

As a nationally recognized speaker on Healthcare Supply Chain Management, Bob frequently appears on radio, television, and in print to provide insight into the ever-changing landscape surrounding healthcare in America. Bob also co-authored the Amazon Best Selling book, "BREAKING THROUGH THE STATUS QUO: How Innovative Companies Are CHANGING THE BENEFITS GAME To Help Their Employees AND Boost Their Bottom Line."