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Putting a Premium on Health

Employers are giving workers a new reason to get in shape: cash.
Melissa Hennessy, CFO Magazine
February 15, 2006

When a Wal-Mart memo describing the retailer's plans to hire and retain healthier workers was leaked to the press last year, it touched off a firestorm. But in truth, many companies are coming to regard a fitter workforce as one way to control health-care benefit costs.

Feeling the pinch of double-digit increases in insurance premiums over the past several years, a number of employers have rolled out various kinds of health-improvement initiatives intended to nudge at least some workers toward lifestyle changes that could help rein in medical costs. While these programs, also known as wellness plans, have been around for decades, companies are now giving employees a really good reason to participate: breaks on their insurance premiums.

In the past, programs offered token rewards, like T-shirts or coffee mugs, but now companies are encouraging participation in wellness programs by offering incentives that attract the attention of workers. Bruce Kelley, a senior consultant at HR advisory firm Watson Wyatt Worldwide, says the incentives usually take one of three forms: a percentage reduction (or rebate) in an employee's contribution toward health-insurance premiums, a cash deposit into a health savings account or health reimbursement account (tax-advantaged accounts used for medical expenses), or gift certificates. In some cases, workers can't afford not to participate. "A typical incentive amount is between $100 and $200 per year, although we've seen them as high as $500," Kelley says.

At PepsiCo, which launched its HealthRoads program in 2004, employees have the option of completing an annual online health risk assessment, which identifies health concerns and unhealthy behaviors. Participants receive $100 in cash for themselves and an additional $100 for a participating spouse simply for answering health-related questions and reviewing the results. Employees can then take advantage of company-sponsored informational resources, one-on-one counseling, or wellness seminars scheduled throughout the year. Those who participate can earn additional incentives in $25 increments. "In its first year, the response level was terrific," says Greg Heaslip, PepsiCo's vice president for benefits. "Nearly 28,000 employees, or 40 percent, of our eligible workers, completed an assessment."

Some companies have achieved even higher rates, largely by linking participation to rebates in health premiums. "Our health-insurance costs were going up 13 to 15 percent a year, but we were no healthier for it," says Harry Goussetis, president of the cylinders division of Worthington Industries Inc. in Columbus, Ohio. The steel processor already had a strong culture of wellness among its 8,000 employees — thanks to its on-site gymnasium, medical clinic, and fully paid health insurance — but management decided that further progress demanded an economic impetus.

The company launched a wellness program based on an annual health assessment that includes specific screenings for weight, blood sugar, and cholesterol. Results place employees into one of three categories: low, moderate, and high risk. Those who are considered low risk automatically receive a full credit on their monthly insurance premiums for the following year ($25 per month for individual coverage and $50 for a family plan). Workers who score in the moderate- and high-risk groups can also qualify for the credit, as long as they agree to take periodic calls from a health professional and create a personal health-improvement plan.

As with other voluntary programs, incentives are based on participation, not on achieving results. "We reward people just for trying," says Goussetis. About two-thirds of the workers at Worthington opted to take part in the program. The one-third of Worthington's workforce who don't participate now find themselves paying for a portion of their health insurance, up to $80 a month for a family plan.

Healthy Rewards
Some companies combine premium discounts or rebates with other incentives. At Weyco Inc., a benefits administration firm in Okemos, Michigan, employees can earn a monthly premium discount "of around $20 to $30 per month for taking an annual health assessment and getting preventive medical checkups," says CFO Gary Climes.

They can also earn additional "Weyco bucks" for taking part in exercise or nutrition programs, which can be redeemed for cash. Weyco, which also instituted a no-smokers policy in 2003, hasn't determined the precise impact of the wellness program on its costs yet, "but I do know we're trending lower since we benchmarked in January 2004," says Climes.

Getting Tough
If incentives don't work, companies can up the ante for at-risk employees. Those with chronic conditions who refuse to participate in disease-management programs, for example, may face restrictions on health-care coverage, higher prescription co-payments, or lower caps on lifetime benefit maximums. In such cases, participation in a wellness program is "the price of admission to full health coverage," says Sue Willette, specialty practice leader at Mercer Human Resource Consulting. She cautions, however, that "a punitive approach may force compliance, but it's unlikely to really change behavior."

Further, federal law limits the extent to which an employer can impose penalties on the less healthy. Under the Health Insurance Portability and Accountability Act, employers cannot ask those with health risk factors to pay a differential of more than 20 percent of the premium. It also prohibits employers from using surcharges to discourage the chronically ill from taking health-care coverage.


Some companies try to engineer a healthier workforce up front by refusing to hire smokers (see "Right to Smoke?" at the end of this article) or, as Wal-Mart suggested in its leaked memo, changing job descriptions to include physical tasks. This new willingness to take a harder line — rewarding those who participate at the expense of those who don't or refusing to hire smokers — strikes some as problematic. "We know that smoking is a costly practice," says Brian Rosman, policy director of the Massachusetts-based advocacy group Health Care For All. "But people don't shed their rights just because they smoke."

Critics say that stricter health policies could be a slippery slope, with employers refusing to hire obese workers not far behind, though such actions could run afoul of the Americans with Disabilities Act. Then there are privacy concerns. "Employers don't necessarily have the right to control what employees do outside of work," argues Rosman. While he supports health-improvement initiatives, he's also concerned that companies could use the plans to force those who are less healthy to pay more, when they are already shifting costs to them through higher co-payments and deductibles. "It's entering into scary territory," he says.

Often the programs are self-funding. In fact, many companies simply raise the contribution levels of nonparticipants to achieve a break-even point based on how much they discount rates to participants. It's the health-care equivalent of raising prices before putting items on sale.

However, Uwe Reinhardt, professor of economics and public affairs at Princeton University, argues that getting tough on employees who exhibit unhealthy behaviors is exactly what companies need to do. "Management is facing tough decisions with regard to controlling [health] costs. You really have two choices: make everyone share more of the cost burden, or use your legal right to go after those who are demonstrably reckless with their health." Since a small minority uses the majority of health-care resources, Reinhardt contends, "they need to be held accountable for their actions."

Helen Darling, president of the Washington, D.C.-based National Business Group on Health, agrees that promoting health by offering incentives makes sense. "When employers looked at their data, it was clear that many of the medical conditions driving up costs are caused by lifestyle choices. Many risk factors — smoking, seat-belt usage, overeating — are entirely within our control," she says. Darling estimates that 80 percent of the National Business Group's 240 members have some kind of health and wellness program in place, and half either do or will offer monetary incentives to employees who choose healthier lifestyles.

To date, there is little evidence that such programs ultimately affect how much companies pay in premiums, although plenty of health experts predict that health-improvement initiatives will begin to pay off in the near future. One Mercer study suggests that a comprehensive program to promote a healthy lifestyle could reduce health-care costs by as much as 3 to 5 percent. And, says Darling, a healthier workforce pays off in other ways, such as increased productivity from lower absenteeism.

Given the benefits, why don't such programs achieve universal participation? Privacy concerns may prompt some to opt out, according to experts. To assuage these fears, companies often contract with an external vendor to gather and store employee health-risk information. Kelley of Watson Wyatt also says that participation rates can suffer if the incentive is not a cash equivalent or the program isn't promoted or explained properly and isn't easily accessible.

Expect more companies to be involved in their workers' health decisions, on everything from how much they exercise to what they eat. And while experts anticipate such programs to remain voluntary, they say employers will continue to raise the price of not participating. As Princeton's Reinhardt says, "You can have your cake, but you have to pay for it."

Melissa Hennessy is a freelance writer in Grafton, Massachusetts.


Right to Smoke?

When Weyco Inc. announced a few years ago that it would no longer hire tobacco users, it triggered the resignation of a handful of smokers — and plenty of controversy. "We're not saying they can't smoke," says Weyco CFO Gary Climes. "We're just saying they can't smoke and work here. As an employee-benefits company, we need to take a leadership role in helping people understand the cost impact of smoking." Weyco takes its policy seriously, going so far as to administer nicotine breathalyzer tests to employees, much like random drug testing. Union Pacific Corp. and Alaska Airlines recently followed suit with smoke-free policies of their own, and other companies are expected to jump on the bandwagon.

But the hard-line option isn't available to all employers. That's because more than 20 states have passed so-called right-to-smoke laws (among them New York, New Jersey, and North Carolina), making it illegal for employers to discriminate against smokers in employment or hiring decisions. Although requiring a smoke-free workforce is still legal in plenty of states, caution is the watchword. "Legislation is not uniform, so employers must be familiar with the laws in every state in which they operate," says Linda Doyle, an attorney at McDermott Will & Emery in Chicago.


The notion of eliminating smokers from the workforce has appeal: they cost an average of $4,000 more per year than nonsmokers in absenteeism, lost productivity, and medical and workers' compensation claims, according to the Centers for Disease Control. But such an approach remains a gray area. Although smokers have tried to be considered disabled under the law, Doyle says, "the federal Americans with Disabilities Act doesn't recognize the nicotine-addicted as a protected class."

Does this trend create a legal slippery slope of employers targeting anyone who might develop health problems — smoking today, obesity tomorrow? Not likely, says Doyle, because smoking is in a different league. "The evidence that smoking is dangerous is undisputed. But obesity caused by a medical condition is protected under the law." What about people who risk injury by, say, racing cars or climbing Mount Everest? "Individuals who engage in risky recreational behavior in their private lives are not protected under laws that currently exist," says Doyle. Skydivers beware. — M.H.





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