When CFO Tony Aukett went shopping for company health insurance last May, he paid careful attention to how each plan would treat employees. No, he wasn't worried about whether the doctors knew what course of action to take for a given illness or injury. Rather, "I wanted to avoid the kind of plan that punishes the employees — for smoking, or for any other behavior," says Aukett, CFO at Continental Paper Grading, a broker of waste paper. "We value them and we want them to stay." By December, he had identified a plan that fits those requirements and cuts the company's annual health-care spend by as much as 18 percent. But Aukett knows the situation will become more challenging. "This is probably a good stop-gap," he says. "But I am very aware of what is coming down the pike, and as much as I want to avoid it, we may not have any choice."

What Aukett would like to avoid, but may not be able to, is what one CFO calls the "penalty box" approach to health coverage. In recent years companies have discovered that they can reduce health-care costs by offering incentives for employees to take better care of themselves. The practice has become so widespread that companies such as Virgin HealthMiles, which is part of Sir Richard Branson's Virgin Group, now offer a service that helps businesses measure employee fitness and come up with creative rewards for those who achieve specific exercise goals.

The problem with the rewarding-the-good approach has been that participation starts to drop off unless management keeps sweetening the pot — which, at some point, dangerously dilutes the return on investment. As a result, "some employers think they have gotten all they can get out of giving people incentives," says Jerry Ripperger, national practice leader of consumer health for The Principal Financial Group. "To reach the next level, they need to try another approach." That means good-bye carrot, hello stick: employees who do not make an effort to quit smoking, lose weight, or otherwise reduce their health risks pay for their decisions — often literally, through higher premiums.

A renewed sense of urgency regarding health-care costs is taking hold because such costs are expected to grow at an average 6.7 percent annual rate between now and 2017 (after rising 6.1 percent in 2007), according to the Centers for Medicare and Medicaid Services. As companies struggling with the dismal economy terminate 401(k) matches — not to mention employees — and take a host of other cost-cutting steps, CFOs are likely to take a harder look at health plans.

In a survey of 320 finance executives conducted late last year by CFO Research Services, more than 40 percent said they intend to reduce the company's contribution to benefits in 2009. A staggering 82 percent expect to control costs by changing their health-care plans. In just one example of the kind of trade-offs finance chiefs are weighing, Guy Anthony, CFO of Quellan, a maker of specialized semiconductor chips, says that because the company had been fairly conservative on salary increases, it could afford to absorb the 8 percent increase in health-care costs. "We didn't make a precise calculus, but we kept the health-care number in front of us when we did our calculations," says Anthony. "We decided not to create angst by changing how much of the premium employees pay."

But containing that angst will require trickier trade-offs in the years ahead. If government estimates are on target, health-care spending will nearly double by 2017, leaping from $2.4 trillion in 2008 to $4.3 trillion. Companies won't be able to easily absorb that increase. Nor will they simply be able to pass it on to workers using the time-honored tradition of raising deductibles and co-pays. The average family premium has already risen by 78 percent between 2001 and 2007, according to the Kaiser Family Foundation. At SAP America, the North American division of the German software giant, the 8,000 employees saw their premiums rise yet again in 2008. "We've asked employees to pick up a greater share of the cost over the past five years," says CFO Mark White, adding that this year, "I'd like to have the employees not paying any more."

For some companies, the only way to avoid passing on the sizable cost increases to employees will be to rethink the very nature of their health plans. "Employers are going to be bearing down on costs like never before," says Phil Litos, president of The Bostonian Group, a benefits-consulting firm. "They may be looking at significant reductions in revenue and restricted access to capital. If that's the case, then they're going to have to take a hatchet to their benefit plans. The question is, How draconian will they get?"

Health-plan Activism
In a 2007 study, Towers Perrin found that companies that aggressively manage their benefit programs and try new approaches can cut their per-employee spending by about $1,500. Actively managed plans with teeth (not to be confused with dental coverage) are already gaining traction among large employers, and smaller ones are starting to take notice, Ripperger reports. "These plans hold employees accountable," says Blaine Bos, a partner at consulting firm Mercer. How so? "By creating a link between healthy behavior and coverage," as Ripperger puts it.

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LinkedIn Company Connections:

• Continental Paper Grading |
• Virgin Group |
• Quellan |
• SAP |
• The Bostonian Group |
• Towers Perrin |
• Mercer |
• Douglas Machine