Feb 8, 2024 - Health

How one company managed to cut its health spending by almost half

Illustration of a hundred dollar bill with Benjamin Franklin dressed as a doctor and holding a prescription pill bottle.

Illustration: Victoria Ellis/Axios

In an era of rising health costs, it almost sounds too good to be true: A midsized Montana-based company managed to nearly halve its per-person health spending in just five years, without dropping benefits.

Why it matters: Pacific Steel & Recycling's success in wrestling down its health spending provides a case study of how employers can cut costs, but CEO Jeff Millhollin said the effort also demonstrates why it's harder than needed for most companies and workers.

Details: The complicated endeavor included a deep dive into insurance claims data, cutting ties with traditional provider networks and having frank conversations with employees about potentially challenging sacrifices.

  • The steel-recycling company, which has roughly 900 employees across 10 states, is self-insured, meaning it pays most of its employees' medical bills while an insurer administers benefits.
  • Executives decided to make a major change roughly 10 years ago as, like many other firms, they struggled to see what they were actually paying for care amid skyrocketing costs.
  • They cut ties with the major insurer to work with a smaller administrator who promised more transparency about costs. The vendor uncovered Pacific Steel was paying much more than Medicare for the same services than it had expected.
  • Teaming up with consulting firm USI Insurance Services, they looked at the claims data and developed a list of prices the company was willing to pay for health care services based loosely on Medicare's rate, a practice known as "reference-based pricing."
  • Those rates were about 160% to 220% of Medicare prices, far less than what they had been getting charged.
  • Working outside of a traditional provider network, Pacific Steel wrote a plan saying it would pay no more than the prices it had determined were fair, said USI senior vice president Scott Haas.
  • "You have to draw a line in the sand and that's what they did," Haas said.

Between the lines: This put employees in a tough position, at least initially, Haas said.

  • Essentially, Pacific Steel told providers they would have to deal with their employees for any costs above what the company itself would pay.
  • Employees were told they could visit any provider — but they might run into some "friction" when the first bills came and the provider told them they owed more than their coverage was willing to pay.
  • Employees had to do something that's usually pretty hard: become engaged shoppers of their health care. That meant paying attention to prices when choosing providers and how much they were getting billed, and then appealing when there was a dispute.
  • "It was rough in the beginning because we all get this programmed in our head that magic insurance is gonna pay for everything and we have no responsibility," Millhollin said.
  • Workers were given contacts for experts who could either walk them through the process of appealing a bill or negotiate directly with providers on their behalf. More often than not, providers agreed to the price, but Haas said the firm was prepared to take legal action if they didn't.
  • Pacific Steel and USI also sought to negotiate agreements with doctors that workers commonly visited. Physician practices that agreed to the company's rates were labeled a "safe harbor," and workers were encouraged to use their services to avoid a potential hassle.
  • The company has since made so-called direct contracting agreements with more than 5,000 medical providers and negotiated bundled prices at hospitals for defined episodes of care, like some surgeries.

By the numbers: By 2019, Pacific Steel reduced its monthly health care spending from $812 per employee to $442 per employee.

  • It saved the company $3.5 million in its first year and now saves more than $6.5 million annually.

The big picture: A small but growing number of companies are taking a much more active role in trying to constrain health costs and sharing the savings with workers, said Dave Chase, co-founder of Health Rosetta, which helps connect companies to vendors providing transparent health data.

  • In one of the most well-known examples, the union 32BJ booted New York-Presbyterian from its network as part of a cost-cutting initiative that saved $100 million and allowed for pay raises to members.
  • Others are finding creative ways to steer employees to lower-cost providers.
  • "We know employers in Boston that have said once they got [claims] data, 'Hey, we're gonna give two years of diapers and wipes if you go to these hospitals that provide great care at a lower price,"' PatientRightsAdvocate.org founder Cynthia Fisher told Axios.

Yes, but: The process Pacific Steel went through likely isn't for everyone. It required executives to get into the nitty-gritty of health care benefits. And it also took time to win employees' trust that the effort was all worth it.

  • In the case of Pacific Steel, in which employees own shares of the company, workers had a direct stake in seeing these costs go down.
  • "When our people got engaged, that's when it got traction and really took off," Millhollin said. "But it was tough on our employees."
  • It also requires ongoing diligence. Millhollin said the company has already started to see costs begin to rise again.
  • "What's killing us today is prescription specialty drugs. So that'll have to be tackled next," Millhollin said.
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