Rethinking Health Care

Heading into this year, $7.3 billion Chesapeake Energy Corp. faced a 10.8 percent increase in the cost of providing health-care benefits — nearly double the expected national average. Higher-trending charges for medicines and hospital care played a part, of course, but in 2007 Chesapeake Energy also experienced a significant increase in unexpected large claims. Still, like any cost-conscious employer, it balked and began looking for a better deal. Ultimately, the self-insured company moved to a new administrator, Blue Cross and Blue Shield of Oklahoma. Thanks partly to the steeper discounts Blue Cross has been able to negotiate with providers, Chesapeake now expects its total health-care costs to climb only 5.3 percent.

But Chesapeake calculates that its move will yield more than a one-time savings. Not only will employees see no degradation of benefits, they'll actually gain some new services, including round-the-clock telephone access to medical professionals and tools to help identify high-performing providers. Over the long term, such features, which will educate employees and allow them to tailor health care to their needs, could play a bigger role in reducing the company's health-care tab than any administrative change.

"Health care will be affected only by total lifestyle changes, and that is the purpose behind these features," observes Lorrie Jacobs, vice president of compensation and benefits at Chesapeake.

It wasn't so long ago — indeed, it still happens — that the common strategy for combating health-care costs was to pass a larger share to employees. Now, progressive employers are thinking more broadly about how they manage health care, and searching for savings at the individual level. Some are even tailoring programs for employees with health risks or chronic conditions, says Guy D'Andrea, president of Discern Consulting. Others are turning to consumer-directed health plans (CDHPs), in which employees are given spending accounts to purchase routine services directly, along with a high-deductible insurance plan to cover nonroutine expenses. None of the solutions is problem-free, but the hope is that by engaging employees in both their health care and the associated costs, they'll become better, healthier consumers.

After racing ahead at double-digit rates for several years, total health-care costs for employers rose by only about 6 percent in each of the past three years, according to Mercer LLC. While some of the moderating may be due to employers shifting more of their premiums to employees, the consulting firm also theorizes that CDHPs and wellness programs are taking hold. In the meantime, companies continue to watch health-care spending. "If I'm not paying attention to what we're spending on benefit programs, that would not be smart," says Chris Lafond, CFO of market research firm Gartner Inc.

Spend Control
Gartner is just one of many firms that began offering a CDHP this year. Its plan is built around a health savings account, or HSA; such accounts are funded directly by employees. An alternative is to build a CDHP around a health reimbursement account (HRA), which is funded by the employer. In addition to shifting more responsibility for spending to employees, both types save employers money by virtue of higher deductibles. Mercer calculates that CDHPs cost employers an average of $5,970 per employee last year, versus $7,120 for an HMO (health maintenance organization) plan and $7,352 for a PPO (preferred provider organization) plan.

EnPro Industries Inc., a Charlotte, North Carolina–based diversified manufacturing company, began offering its 2,800 U.S. employees an HRA-based CDHP five years ago. Approximately 1,800 use it; the remainder have stuck with an HMO offering or declined coverage. Steve Spradling, director of compensation and benefits, estimates that EnPro saved about 11 percent over the first three years compared with what it would have spent if it hadn't introduced the CDHP, and that the company's costs since then have continued to increase at a slower rate.

He credits that in part to an educational campaign. "We did a tremendous amount of communication in the first two years," says Spradling. "This was a new way of paying for and delivering health care, and the average employee was skeptical. But people have found over time that this is a very clean way to deliver it."

One notable change, Spradling notes, has been "very high usage of generic drugs" since the CDHP was initiated. The company is still struggling to get employees to use a lower-cost mail-order program, though, so it is now contemplating offering some financial incentive, such as paying for the first 30-day supply.

To date only about 5 percent of all employees are enrolled in CDHPs, according to Mercer, despite evidence that they save employees money. HealthPartners, a Minnesota-based not-for-profit HMO, found that employees in CDHPs spent 4.4 percent less than those in traditional plans because they used lower-cost or more-efficient providers. But there is a caveat: the study also found that CDHP participants tend to be younger and healthier, raising the question of whether insurers could segment employees in ways that could undermine the pooling of insurance risk.

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