Companies with aggressive programs designed to improve employees’ health like to talk about such efforts being “the right thing to do” for workers. Some are also not shy about ballyhooing the positive cost impact that’s thought to flow from a healthier work force.

Now comes new research that is among the first attempts at establishing a link between the quality of a company’s health-care programs and movement in its stock price. The study was not designed to prove a cause-and-effect relationship, which would require controlling for a host of other factors known or suspected to influence share prices. But it does show a strong, clear correlation.

The research was led by Raymond Fabius, vice chairman of health-care research firm HealthNext and a longtime corporate medical leader whose career stops have included chief medical officer posts at General Electric and Thomson Reuters, and Dixon Thayer, the CEO of HealthNext. He and other researchers constructed four hypothetical stock portfolios populated with public companies that have won the Corporate Health Achievement Award (CHAA) of the American College of Occupational and Environmental Medicine (ACOEM) since 1997.

CHAA applicants go through a rigorous application and review process in which they are graded on 17 standards of health-care delivery and outcomes.

Portfolio 1, launched retrospectively as of July 1, 1999, was composed of the first five companies that won the CHAA (there are multiple winners some years): Lockheed Martin, Boeing, IBM, Johnson & Johnson and Glaxo Wellcome. An initial investment of $10,000 was divided equally among the five. Dow Chemical and GE Power won awards the next year and were added to the portfolio, and the original investment plus returns through June 30, 2000, were rebalanced such that there were equal investments in seven companies from July 1, 2000, through June 30, 2001. The same process continued for awards presented through 2011; tracking of the portfolio ceased as of June 30, 2012.

The same was done with Portfolio 2, the only difference being that investments in the companies were weighted according to the score each received from the program reviewers. With Portfolio 3, researchers set the start point of the Portfolio 1 investments two years earlier — to July 1, 1997, shortly after the CHAA was first awarded. Portfolio 4 was the same as Portfolio 1 except that the best and worst stock performers were deleted from the group.

Some award winners were excluded from the portfolios or cut along the way­. Those that were privately held were not included, and those that were acquired after winning the award were then eliminated. Also, the CHAA award winners in 2012 and 2013 were not included because there was insufficient share-price performance data. By the end of the study period, there were 16 companies in three of the portfolios and 14 in the other.

All four portfolios performed vastly better than the S&P 500 from their launch date to the end of the study period (see chart below).

It was clearly not an overly scientific study. For one thing, the companies that have won the CHAA are not ordinary enterprises. Many of them have been consistently considered among the best-run American companies. (In addition to those named above, they include Bristol-Meyers Squibb, Eli Lilly, Kerr-McGee, BAE Systems, Marathon Oil, Union Pacific, Daimler Chrysler, Caterpillar and EG&G-URS.) So the study may simply have identified stock-market outperformance by well-managed companies generally, rather than by those making outstanding health-care efforts specifically.

The authors recommended that the research be updated every five to 10 years. “More research needs to be done to better understand the value of building ‘cultures of health’ at the workplace,” they acknowledged in their report on the study, which was published in the September 2013 edition of the Journal of Occupational and Environmental Medicine. “Although ‘smart’ companies may simply outperform, the evidence appears to be building that healthy workforces provide a competitive financial advantage in the marketplace.”

For example, a 2010 study led by Harvard University professor Katherine Baicker concluded that within three years of launching an employee wellness program, employers save an average of $3.27 for each program dollar spent.

A 2012 study by Towers Watson divided 335 North American companies with at least 1,000 employees into three approximately equal-sized tiers — those with high-, medium- and low-quality health-care programs and stress indicators, as determined by surveys of HR leaders. Highly effective companies had average revenue of $422 per employee, compared with $288 for low-effectiveness companies.

The fact that the HealthNext stock portfolios contained a maximum of 16 companies at any one time might be another limitation. But, says Fabius, in performing such research “there is a balance between selecting too many companies, because at some point you’ll just be echoing the market, and too few companies so that you’re not able to show anything of significance. I think we did a pretty good job of balancing those considerations.”

A Culture of Health
Only two companies, IBM and Johnson & Johnson, have won the CHAA twice. Fabius says the application and review process is so grueling that most winners are content with their laurels after getting the award.

Dominic Caruso, finance chief at Johnson & Johnson, a winner in 1998 and 2012, tells CFO that his main role regarding health care is to help “set a tone at the top, so there is a culture of health that is built into the fabric of the company.”

That culture well predates Caruso, who joined the big health-products company in 1999 and has been CFO since 2007. But that doesn’t make him appreciate any less the financial benefits said to come from Johnson & Johnson’s  employee health-care efforts. “When I make an investment I expect a return, and this is surely a dividend-returning investment,” he says. “Generally speaking it’s yielded us $2 to $4 of cost savings for every dollar spent” on promoting improved health.

The share price of J&J common stock was $63.13 at the beginning of the study period and $67.56 at the end (not taking inflation into account), but market capitalization more than doubled, as there was a two-for-one stock split in 2001. It’s impossible to know how much of that growth was attributable to the company’s internal health-care approach. But a 2011 article in Health Affairs, co-written by Fik Isaac, J&J’s executive director of global health services, painted a compelling picture of the impact on the company’s bottom line.

The article was based on an exhaustive study in which health-care consumption and costs for 31,823 Johnson & Johnson employees were compared with those of an identical number from a group of 16 companies that gave the article’s authors access to their health-care data. J&J blindly selected those companies from a bigger pool of large, self-insured manufacturers. Each J&J employee was individually matched with a “statistical twin” employee from the comparison group in terms of demographics, medical-care enrollment, medical-care claims and health-assessment records.

From 2002 through 2008, J&J’s average annual increase in medical and drug costs was 1.0 percent, compared with 4.8 percent for the comparison companies. The difference equated to $535 in 2007 dollars per employee per year (PEPY). That in turn represented $3.92 for every dollar J&J spent on health promotion, estimated to be $144 PEPY. The $144 figure was the average annual PEPY cost for wellness programs that Baicker found in her research; conservatively estimating that J&J’s actual PEPY cost for all health-promotion efforts could be as high as $300 PEPY, the savings would bottom out at $1.88 per dollar spent.

J&J employees had better health outcomes than the comparison group when measured by alcohol use, blood pressure, cholesterol, nutrition, obesity, physical activity and tobacco use. The only areas where J&J fared worse were depression and stress. Isaac says he doesn’t know the reason for that, but notes the company responded with a program called Energy for Life that aims to holistically manage participants’ nutrition choices, physical abilities, and spiritual and mental health.

The company’s comprehensive health and wellness programs include offerings for improving physical activity, guidance on nutrition, lifestyle management coaching programs and chronic disease analysis. J&J also routinely analyzes aggregate health-assessment data to identify health-risk trends among employees, often accompanied by biometric screenings of height and weight, blood pressure and cholesterol levels. Based on the results of such screenings it then develops customized programs to address employees’ health risks. The company also has on-site health clinics and exercise facilities.

J&J annually incorporates expectations for continued health-cost improvements into its financial projections. “The reduced rate of increase in costs is something we take into account annually when we’re preparing budgets,” says Caruso. He says the company is still getting better year-over-year returns from its health-care investments, although eventually, if the work force were to reach a certain level of healthiness, there would be diminishing incremental returns.

Like J&J, most CHAA winners are deep-pocketed companies that can afford the up-front cash outlay needed to launch ambitious health-management programs. But, says Caruso, “Smaller companies can show a commitment to health in their leadership messages, as we do. I will say that it takes years of diligence and staying on top of things. You shouldn’t underestimate that. But it is an investment that will pay you back.”

Hands-On Leadership
Michael Critelli was general counsel at Pitney Bowes in 1990 when he was asked to take over human resources as well. A year later he listened to an audiotape of a lecture by Dartmouth College professor Jonn Wennberg, who did pioneering research showing the wide spectrum of pricing for particular medical services, even within the same geographical area. And overall health outcomes were no better with the costlier providers.

“I figured that if you can spend more and not get any better results, you should be able to spend less and get at least the same results,” says Critelli, who set about reinventing Pitney Bowes’ approach to health care. His interest in and oversight of health care continued after he became the company’s chairman and CEO in 1997.

The company has never won the CHAA, but it has earned a number of other awards and is regularly cited for its achievements in employee health care. Critelli, who left Pitney Bowes at the end of 2008 after 29 years with the company, is now CEO of Dossia, a health-records service that competes with Microsoft’s HealthVault and Google Health.

Critelli says the establishment of on-site health clinics earned Pitney Bowes the best bang for its health-care buck. But an innovative prescription-drug program drew the most attention. In 2007 the company reduced employees’ share of the cost for chronic-disease medications, and eliminated it entirely for cholesterol drugs. “If you want people to take their medicine so they don’t wind up in the hospital, the worst thing you can do is charge more for it,” Critelli says.

Educating employees about the impact of their health-care spending on company finances also paid off, according to Critelli. “I think there’s a fundamental confusion on the part of employees,” he says. “They can pay a doctor $50 or $100 for a visit, and it doesn’t matter to them which. For them, the key is getting access to the care.”

Health care fit especially highly on Critelli’s list of priorities because, he says, “When you’re not able to raise salaries or other cash benefits, you try to figure out what other visible things you can do for people to send a message that you care about them.”

But the cost benefits were high. Critelli says that during his CEO tenure Pitney Bowes’ health-care efforts were saving $40 million to $50 million a year. “For a 10 percent pretax-margin business, it’s a lot easier to [improve health care] than go out and find a $400 million business to produce the same bottom line.”

Asked about HealthNext’s stock-price research, which Fabius showed him, he says, “I can’t speak to its precise statistical validity, but I do think it’s directionally correct and that there’s a good conceptual basis for what they’re doing.”

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