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Can more employee choice actually lower costs?
Randy Myers, CFO Magazine
February 1, 2008
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.
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.
Another type of segmentation may be more palatable. Tailoring health-benefit programs to the health segment that employees and their families belong to — a concept that consulting firm Watson Wyatt Worldwide calls targeted consumerism — could reduce costs. "It's a targeted approach to looking at how employee populations use health-care services," says Watson Wyatt's Ted Nussbaum. "Five percent of the population drives 50 percent of the costs, and 70 percent drives 10 percent. We look at what proportion of the population falls into various segments to help employers decide what to emphasize. For younger, healthier employees, you target health-improvement programs — diet, exercise, weight loss. At the other extreme, you have disease-management or health-management programs that can keep people with acute conditions stable or improve their health."
Lafond says that when Gartner decided to offer an HSA to its employees this year, alongside its traditional PPO and HMO offerings, one of the attractions was that it would likely appeal to younger employees, who are less likely to be confronting major medical expenses but nonetheless cannot afford to forgo insurance.
In addition to three types of insurance plans for its U.S. employees, for example, Gartner also offers the Gartner Employee Assistance Program in the United States and Canada. Through a third-party provider, associates are given access to counseling on a wide range of issues, including family concerns and substance abuse. Features include unlimited, 24-hour-a-day access to a telephone hotline and three live visits with a counselor annually. "I can't really say what cost benefit this has provided," Lafond says, "but we hope that providing an avenue to deal with issues early can impact costs longer term."
EnPro is taking the idea of tailoring one step further. "We already pay 100 percent of an annual physical and have disease-management and wellness programs," Spradling says. "In 2008, we want to expand some of these programs on-site. We're looking at what types of programs may best suit an individual who, say, lives in Deloitte, Wisconsin, [versus] an employee in Houston. For example, we may have a higher incidence of diabetes in one location, so we may put a stronger emphasis on diabetes education there."
While health-care consultants generally agree that giving employees greater control over spending should drive down costs, they also agree that won't happen without access to reliable quality-of-care data. For competitive reasons, however, plan administrators are loathe to disclose their financial arrangements with health-care providers. And many providers shy away from reporting quality data, concerned that there are too many underlying variables to make comparisons.
Fortunately, headway is being made. Not-for-profit organizations such as the National Quality Forum, The Leapfrog Group, and Bridges to Excellence have all developed metrics for assessing quality. The simplest metrics, says Leapfrog Group acting CEO Karen Linscott, are procedural: for example, does the provider follow accepted best-practice procedures, such as administering beta blockers after a heart attack? Next in value are structural metrics: Does the provider have adequate staffing? Finally, there are outcome-based metrics: How do a hospital's infection and morbidity rates compare with its peers'? "Outcome metrics are the gold standard, but there aren't many of them," Linscott laments.
In addition to the work being done by not-for-profit organizations, some plans have started to identify subsets of higher-quality providers. But Nussbaum cautions that the exercise may need to be more rigorous. Right now, he says, some higher-performing networks include two-thirds of a plan's physicians, calling into question just how well they separate the wheat from the chaff. One problem: health plans are torn by the conflicting desire of participants and employers to be able to choose from many providers and the obvious benefit of including only top performers in networks.
Despite such caveats, one benefit Chesapeake Energy saw in moving to Blue Cross and Blue Shield of Oklahoma was its ability to pool claims data with others in the national Blue Cross Blue Shield Association. Specifically, Blue Cross allows participants to see data on providers across the nation in order to make educated choices.
The Downside of Empowerment
To be sure, the trend toward giving employees more control over health care runs risks. "To me, the real danger is that we lack the information required for consumers to behave in the way we hope they would," D'Andrea says. And John Asencio, senior vice president of Sibson Consulting, speculates that that is one reason why CDHPs have "not taken off."
D'Andrea also concedes that workers responsible for more of the first-dollar spend on health care might be tempted to seek care less aggressively. "That is the danger, but in some ways that's also the point of these plans — to ask employees to make that cost/benefit analysis," he says. The HealthPartners study, however, does indicate that employees did not avoid care but instead got preventive services.
There is also a fiduciary risk associated with HRAs that should not be overlooked, says Chip Kerby, a partner with McDermott Will & Emery, especially since such accounts are not covered by ERISA. And ultimately the question must be asked: Could all this segmentation lead employers to hire only younger, healthier workers? It's an idea D'Andrea discounts. "To the extent that's a problem, it's a problem that already exists today," he explains. "A self-insured employer would have that incentive today, and I don't think it's a pervasive problem."
Perhaps not. But the jury is still out on whether consumerism is the answer to all that ails health-care economics.
Randy Myers is a contributing editor of CFO.
Just Say No
Could employers be partly responsible for the runaway health-care costs of the past few decades? Many consultants say yes, by virtue of having endorsed insurance schemes indifferent to quality of care. "Most existing health plans have incentives that reward providers for providing more care and high-intensity care, not high-quality care," observes Guy D'Andrea, president of Discern Consulting.
One employer — the federal government — plans to change the paradigm. Beginning October 1, Medicare will stop paying for some preventable medical conditions that patients acquire in hospitals, including certain infections and pressure ulcers. The dual goal is to push hospitals to provide better care and lower costs.
Private plan administrators are watching the model closely — and some providers are also taking action. The Leapfrog Group, a not-for-profit organization of employers and other health-care purchasers, recently announced that 658 hospitals will adhere to its "Leapfrog Never Events" policy, meaning they'll waive costs related to rare medical errors, such as operating on the wrong body part. They represent just over half the hospitals that responded to the 2007 Leapfrog hospital survey. — R.M.