What Can Healthcare Learn from a Financial Services Pioneer?
On January 16, John Bogle, founder of the Vanguard Group – a leading provider of indexed, low administrative fee mutual funds – passed away at age 89. He was a true disruptor who revolutionized the financial services industry in many ways.
From my almost 20 years working in various operations and leadership roles in healthcare, I’ve come to understand that there is no silver bullet to “fixing” our fragmented and costly system. But most agree that we need real change and disruption – and in that way, we have a lot we can learn from John Bogle:
1. Administrative costs matter
Bogle espoused the notion of low-cost indexed funds as a means to reduce administrative fees. He believed every dollar that went to administrative fees meant less for the investor. And he was right: re-investing those fees can really add up over a lifetime, especially due to compounding.
In healthcare, the industry average expense for private insurance administrative fees is 12-18%, with Medicare expense fees estimated at 2%. In the United States, the total cost of healthcare administration ranges from $360 billion to $440 billion each year. Now some of that cost is needed to provide and improve care, but it’s hard to justify it all. Healthcare admin fees alone in this country are larger than the entire airline industry, valued at $222 billion in 2017, and just a bit below the entire amount we spend on higher education (estimated at $497 billion in 2018).
Here’s another way to view this: for individual companies, a 15% administrative fee on a $20,000 family plan equals $3,000. In a typical 80/20 cost share, $2,400 is paid annually by the employer and $600 by the employee. So for a mid-sized firm with 250 employees on the family plan, $600,000 is spent annually on admin fees alone. That’s $600,000 not being used to invest in the firm, upgrade technology, hire and train staff, grow markets, etc. Now, imagine compounding that over 20 to 25 years. It’s not impossible for a mature industry like healthcare to drive efficiencies and lower costs, and Bogle would likely point out that we’ve got some room for improvement on admin costs.
2. Community intelligence can improve outcomes
Bogle believed in the power of the whole – versus an elite few stock-pickers and money managers – in his creation of indexed funds. It’s said these funds were derided early on as “un-American” by competitors. But it’s also well-documented that these funds have outperformed the vast majority of money managers over the long term.
We can see a parallel in healthcare, which is certainly reliant on dedicated and knowledgeable professionals. But like investments in markets, it’s often too complex to understand all aspects of any human condition. Human health conditions are a result of more than one specific component, yet all too often only individual pieces of the presenting condition are taken into account. Integrated care and population health activities, including factoring a patient’s whole story and community context into care, can improve the likely outcome.
3. Price transparency is helpful, but not enough
Despite the better performance of index funds, the significantly lower fees associated with them (an average annual fee of .09% for indexed vs .78% of actively managed or $0.09 per $100 invested vs $0.78 per $100), and the emergence of clarity of other fees in the financial services space, only about 25% of mutual fund investments are invested in indexed funds. Why is this? It’s possible that people think they, or an investment professional, can outsmart the market. Or perhaps sales and marketing efforts convince them of that point.
When it comes to healthcare cost challenges, price transparency coupled with provider performance ratings is often cited as a potential savior. While more transparency is certainly helpful, the fact remains that healthcare decisions are even more rapid, personal and more emotional than financial decisions. It will take more than understanding cost and performance to quickly change the decision-making of U.S. healthcare consumers.
4. Ownership structure sets the tone
Bogle established Vanguard as a mutual trust, which basically means the company is owned by the investors in the funds themselves, not shareholders. This generally aligns decisions with what’s best for investors and clients.
The common structures in healthcare are either non-profit or publicly-traded entities. There are certainly pros and cons in all structures, but a similar trust model to Bogle’s could better align with members, patients and communities. That alignment, in turn, could ensure more consumer-centric, customer friendly and fiscally prudent management of healthcare organizations.
5. Compensation should be aligned with mission
John Bogle’s estimated net worth is about $80 million. That’s certainly a significant figure, but it’s only about 1% of the net worth of other financial service industry titans. And while Bogle’s philosophy, investment approaches and the organizational structure limited his personal earnings, it all supported his mission of benefiting his customers through lower fees.
Many agree that compensation in all industries needs some review. However, better aligning and controlling all costs in healthcare – top to bottom – would enable closer alignment with the interests of our communities and the nation as a whole.
While healthcare and other industries have a lot to learn from John Bogle and his financial acumen, he benefited greatly from the collective progress in both population health and scientific advancements. Bogle lived to 89 and was active and productive until the end. He experienced his first heart attack at 31 and had a heart transplant at 66.
John Bogle was fortunate to be born in the golden age of healthcare advancement. But if we take his valuable lessons to heart, Bogle’s legacy of innovation can inspire a new golden age of healthcare progress as well.