51% of total health costs are attributed to lost productivity at work in terms of on-the-job performance and absence. The other 49% is made up of direct medical costs (27%) and wage replacements (22%). Thus, most health care ‘costs’ to employers aren’t in the medical care or insurance line item at all — they’re in productivity.

 “The ultimate ‘good’ to be purchased from our health care ‘system’ is the overall health of Americans,” asserts a new report, Synergies at Work: Realizing the Full Value of Health Investments, from researchers at the Center for Value-Based Insurance Design at the University of Michigan (my alma mater) and the Integrated Benefits Institute. The study was sponsored by the National Pharmaceutical Council. The report was published in February 2011.

Since employers, aside from government, are the main purchaser of health insurance for the American workforce, it’s important to understand the full value of that spending and the outputs produced from the investment.

The question of what value U.S. employers get for their money spent on health insurance hasn’t been well quantified. This report gets to that answer, pointing to the need for comprehensive measures for defining and quantifying “value.” First, defining the “v”-word: the report defines value as the fiscal impact of added health and related work outcomes generated form health spending.

Now, to parsing out the health value equation. The researchers reviewed many empirical studies and explain that while the use of some medical services — say, prescription drugs — might not save money overall, the use of the service could avoid added costs of less desirable medical outcomes and complications. Think of this as a full life-cycle costing exercise. An example offered in the report is rheumatoid arthritis: reduced use of evidence-based therapies for RA led to more absences of longer durations, more disability time off from work, and lower job performance. These three elements add up to lost productivity that costs the employer.

Thus, the report calls for expanding the paradigm of economic benefits/costs that accrue to the employer-payers of health care. That means identifying and aggregating both direct medical costs and productivity costs to sum up the full costs of health. This approach is rarely studied in the literature.

Health Populi’s Hot Points:   The report begins with the context, “Restoring ‘health’ to the health care reform debate.'” There’s traction in the market, both from public and private sectors, to take the full-health-value approach to understanding the real ROI of health spending. Some employers, in particular, have been expanding adoption of value-based benefit designs which take into account both full benefits and costs, as well as enrollee-patient considerations (e.g., the impact of healthful ‘nudges’).

Employers are at the grassroots, frontline of changing the health system through expanding their paradigm of health costs and benefits, and getting innovative with engaging, value-based solutions for employees and their families. By taking this approach, business will not only do good; they’ll do well fiscally.