Mounting Costs

The reasons are familiar: rising prescription drug costs, expensive equipment and tests, retiree health plans and declining corporate leverage with a consolidating health care industry.

Today, the average annual cost of health care coverage is $2,736 for a single employee and a whopping $7,932 for an active employee with a family. In 1999 the costs were $1,922 and $5,652 for a single worker and an employee with a family, respectively. And even after employer initiatives over the past five years to shift the burden back onto the employee through co-pays, increased premiums and higher deductibles, active workers still contribute only about 17 cents for every dollar paid for health care premiums or their equivalents.

Retiree health care costs, in particular, are ballooning. Take the case of the manufacturer that recently contacted Helen Darling, president of the Washington Business Group on Health, which represents large employers on health care issues. Company bean counters estimated that the retiree health care bill for 2003 would be $35 million higher than this year–a 20-cent-per-share earnings bite. "It's frightening," Darling says.

To make matters worse, most believe there are more hikes in the pipeline. The Tillinghast-Towers Perrin survey showed that 88% of the corporate respondents predict similarly large increases through 2006. This means that by 2007 many companies could be looking at health care costs almost double what they were at the start of the new century. "Most companies are at the point where they have to do s

omething," says Tillinghast-Towers Perrin senior health care consultant Richard Ostuw. "They can't keep absorbing it." So what does a forward-looking company do to fight the tide? Clearly, there is no silver bullet, and executives say they don't expect–or want–Washington to step in with convoluted solutions. But there is a common theme developing in private sector efforts by corporations tired of having their balance sheets made sickly by health care. The new "new approach": Instead of focusing on making the system cut costs through managed care or HMOs alone, focus on making the consumer more cost-sensitive and health-conscious. As Joseph Martingale, national leader for health care strategy at employee benefits consultant Watson Wyatt Worldwide, puts it, "Empower consumers to take charge of their own health care."

This consumer strategy gives employees greater control of their medical care and medical dollars and more responsibility to stay healthy. At its core is the assumption that if a company puts an employee in charge and on the hook for the cost of his or her own health care, the worker will make more cost-effective decisions. Some employers dream of plans as simple as handing employees a chunk of money and then instructing them to handle their own health care as they see fit, essentially a voucher approach similar to what some education experts have proposed as a solution to the failures of that institution. Others are already undertaking far more complex responses, attempting to "intervene" through disease management to make sure employees adhere to medical regimes. In the Tillinghast-Towers Perrin survey, about 13% of respondents reported that they are looking at some kind of "consumer-driven" health care.

The newest experiment involves what are called "defined-contribution" products. These plans typically give employees an annual cash allotment, called a personal account or something similar, to spend as they please for health. If that money is used up, employees face a fairly high deductible before more conventional medical coverage kicks in. In many plans, any unused portion rolls over and is added to the following year's allotment. Employers hope to see savings from employees who, when confronted with the real price tag for the medical services, decide to shop for better value. "Right now, doctors and hospitals have employers' blank checks. You pay your $15 co-pay, and it's all you can eat," says Larry Becker, Xerox Corp.'s director of benefits. Earlier this year, Xerox introduced a consumer-driven program, which Becker says won't save that much money immediately, but should make employees more sensitive to what their health care is really costing.

Personal Health Accounts

That's the idea behind a new program at St. Louis-based cable company Charter Communications Inc., which added a personal health account plan this year. Single workers pay about $450 a year to participate in the plan, provided by Definity Health, one of a growing number of companies offering defined contribution products to employers. Participants buying coverage for one person have a yearly allotment of $750. If their medical spending exceeds that, they are responsible for the next $500. Once the employee hits $1,700 in annual health care expenses, a more traditional managed care plan kicks in, generally giving full coverage to those who use "in-network" medical services.

So far, about 6% of Charter employees have enrolled. Don Broecker, director of employee benefits, hopes that over time their annual increases in health care costs will lag 2% to 4% behind their counterparts in other plans. "People become much wiser health care consumers" with these accounts, he says. "If the doctor prescribes a brand-name drug, they might go back to the doctor and say, 'You know, this is coming out of my pocket more than ever before. Is there a generic version?'"

Broecker's focus on prescription drugs is not surprising, given the steep rise in pharmaceutical costs. Last year alone, the price of prescription drugs rose on average about 16%, according to a study by the Kaiser Family Foundation. In fact, pharmaceutical pricing is the one area in which executives seem to think government intervention might help: An employer survey conducted last year by the Kaiser Family Foundation and the Health Research and Educational Trust found that 40% of respondents picked government intervention as the most effective strategy for containing drug prices.

To combat the inflation, employers are now providing "three-tiered" plans for prescription drug coverage instead of the one-size-fits-all co-payment programs of the past. Typically, employees make the smallest co-pay (an average of $8, according to the Kaiser/Health Research survey) for generic drugs; a mid-level co-pay ($15) for a drug with no generic equivalent and the highest ($20) for a brand-name drug with a generic counterpart.

This approach isn't particularly unique, mirroring the in-network and out-of-network fee system of managed care. It does, however, make employees more aware of cost differentials between generic and brand-name drugs.

Some drug strategies actually require companies to spend upfront to make brand-name drugs cheaper for employees. For instance, Pitney Bowes Inc., the $4.1 billion maker of mailing equipment, will spend $500,000 this year to ensure that employees with congestive heart disease, diabetes and depression will take all the drugs they need. "If you're in these three disease groups and you take less than seven drugs per year for the disease, your probability of being a large user of services again the following year is 70%," says David Hom, Pitney's executive director of global strategic human resource innovations and employee communications. Hom notes that a study conducted by Pitney of those employees who cost more than $10,000 annually in health and pharmaceutical benefits suggested that some workers suffering from these three diseases failed to fill prescriptions in an attempt to save money. That behavior cost the company more in the end.

Focusing on Serious Risks

The more innovative consumer-driven fixes get into even more complex attempts to manage treatment of the most costly chronic diseases, such as heart disease and diabetes. "Disease management" programs, as they are usually tagged, come in many flavors, but what they all have in common is an effort to identify employees facing serious health risks and give them coaching to improve their chances of staying well. Employees who have an ailment but are at low risk of getting sicker might receive health information in the mail. Those at highest risk could be paired with a nurse who periodically calls them to discuss how lifestyle affects disease, monitors indicators such as blood pressure and makes sure drug regimens are being followed.

These programs don't come cheap. Bruce Kelley, a senior health management consultant with Watson Wyatt, says that participation for an employee with coronary artery disease, for example, could cost an employer as much as $1,000 to $1,200 yearly. Still, employers who buy into disease management believe these costs pale next to the price tag for major surgery or other consequences of unchecked illnesses. One study on potential savings, conducted by Ernst & Young for disease management company American Healthways, found that total health care costs for a group of diabetics dropped 29%, from $2,380 to $1,695 monthly, a year after a disease management system was put in place.

Hom at Pitney Bowes concurs, noting that studies suggest that as much as 40% of health care costs involve just 2% of a company's covered workforce. For Pitney Bowes, that translates into about 1,000 employees driving as much as $40 million in annual health expenses.

The company has an extensive disease prevention and management program, including five on-site medical clinics that concentrate on employees with chronic conditions, but also provide preventive screening for others. This effort is supported by an online education program and a "Health Care University" in which 5,000 employees participate. Hom says that Pitney's aggressive campaign has paid off, with per-employee costs 20% below average and employee contributions about 30% below average.

At Oklahoma-based non-profit hospital operator Integris Health Inc., four ailments–asthma, diabetes, coronary artery disease and emphysema-related disorders–were identified as the big-ticket items that were eating up a disproportionate amount of health care dollars. About 175 Integris employees–75% of the 233 that the company felt needed disease management–signed up for the program after it was implemented last January.

Already, Christopher Havens, human resources director for Integris, is predicting that the plan, which is provided by LifeMasters Supported SelfCare Inc.–one of a number of young disease management companies offering services to health plans, employers or both–will pay for itself this year. Next year he expects to save $10 for every $100 spent. That does not count whatever savings accrue from having physically fit workers on the job. "When you keep people healthy and save money on top of it, it's a good approach," Havens says.

Apparently, a slowly increasing number of major employers are coming to agree. About 38% of the organizations polled by Tillinghast-Towers Perrin reported having introduced chronic disease-management programs since 1999. Another 19% said they are considering doing so.

Sticking with It

But don't be too quick to run out and sign up. Like all plans, disease management has its kinks. According to Jon Christianson, a professor of health care policy and management at the University of Minnesota, one of the biggest pitfalls is the fact that employees are not always that willing to stick with the program. The drop-out rate in plans, he says, "is a huge issue"–one any employer considering disease management should question vendors closely about. "Disease management programs can be effective only if patients stick with them," says Christianson.

Employers also should prepare themselves for some employee concern about privacy. When Integris launched its program, Havens says he got a few inquiries from employees who wanted to know "Who is LifeMasters? And how did they get my name?" The anecdote indicates that for some employees medical privacy is hardly a trivial issue. Indeed, a recent survey of full- and part-time employees by the non-profit organization Privacy & American Business found that close to one-quarter of respondents were concerned about how their employers collected and used employee health care information.

Wellness programs like Highsmith's aren't without their negatives, either. From an employer's perspective, these programs take a lot of time, effort and thought, in part because there's no custom-made plan. After all, an office made up largely of men over the age of 40 will almost certainly present a different set of health needs than one made up primarily of women of child-bearing age, notes Bo Abresch, a spokesman for the Wellness Councils of America, an Omaha, Neb.-based non-profit group promoting worksite wellness. A return on investment is more likely to be seen in years, not months, he adds. And, even after the passage of time, the program's real effect on the bottom line may be tough to measure, adds Larry Levitt, vice president of the Kaiser Family Foundation.

Still, the Highsmith wellness approach, ranging from smoking-cessation classes to installation of on-site gyms to on-site free testing for skin cancer or cholesterol or high blood pressure, has caught fire in recent years, too. About 27% of larger employers have launched wellness programs over the last three years. Few are as all-encompassing as Highsmith's, but even a humble effort can contribute to employee well-being. West Mill Clothes Inc. took the simple step of removing junk food from vending machines in the company lunchroom last year. That action came after Clifford Goodman, director of human resources at the New York City-based tuxedo maker, attended a seminar for employers on obesity. "No more hamburgers, cheeseburgers. They are out," he says.

Experts warn corporations not to expect miracles with any one approach and not to forget the reason why health care benefits became part of many employment packages to begin with. Kaiser's Levitt points out that companies that introduce consumer-driven plans run the risk of having only healthier and wealthier employees enroll, with one group figuring they'll never face paying the deductible and the other being more than able to afford it. In addition, says University of Minnesota's Christianson, consumer-driven schemes are complex, and some employees, already overwhelmed by having to learn the ins and outs of managed care, could balk at learning a whole new game.

Perhaps most important, Christianson warns that some of the consumer-driven approaches, particularly the defined contribution plans, are really based on employees avoiding trips to the doctor, even when they may be called for. "You are relying on the consumer to make the judgment about what's an appropriate and inappropriate visit," he says.

Still, experts such as Regina Herzlinger, a Harvard Business School professor and author of the forthcoming book Consumer-Driven Health Care, believe the answer rests in the marketplace and giving consumers more power over how they spend their health care dollars. For the moment, simply handing employees vouchers to buy their own health benefit is unworkable, because individual health insurance is difficult to find and far more expensive than participation in group plans, she says. But, just as the advent of 401(k) plans a quarter of a century ago spurred the creation of a huge market in competing mutual funds, Herzlinger believes a similar move in employer-sponsored health care could get the competitive juices flowing in medicine. Likewise, Herzlinger asserts, consumers "will force the health care industry to become more productive: higher quality, lower cost."

The wisest move that a company can make is to treat health care the way it would any other business-related expense, says Darling of the Washington Business Group on Health. That means, among other things, that executives in both the finance department and human resources need to become thoroughly familiar with the health care market and the vast variety of new providers for some of these consumer-driven approaches. They also must make sure employees realize that the true cost of health care is much higher than their co-pays and premium payments, she adds. Some companies are already doing just that in memos, distributed during annual benefit enrollment periods, which spell out the company's contribution to health plans.

Such news might not make employees happy about increases in deductibles or premiums, but at least they'll understand why costs are rising. And while there's "promise" in some of the new approaches to containing health costs, Darling says it's too early to say how well they will work.

For now, she says, executives need to apply their business smarts to medicine and become "aggressive day-in, day-out managers of health care benefits."

– Susan Kelly contributed to this article.

INTRODUCING QUALITY MEASURES

By Susan Kelly

In New York City, four major companies–IBM Corp., PepsiCo Inc., Verizon Communications Inc. and Xerox Corp.– are actually volunteering to pay higher fees to hospitals that care for their employees. There's a catch, however: To qualify for a 4% bonus this year, the hospitals have to meet a set of standards that help ensure a certain level of quality care.

Why pay more? Because companies have learned something that a good plumber could have taught them years ago: If you pay a little more for a higher quality product, you will probably be better served over the long run, and it will ultimately cost you less. "It's worth investing money in quality because at the back end you're going to get a return on your investment," says Barbara Brickmeier, director of benefits at IBM.

That return comes with healthier employees. And there is growing evidence to back the claim: In 1999, the Institute of Medicine reported that as many as 98,000 deaths annually in U.S. hospitals can be linked to preventable medical errors and the total cost of those errors, including lost income and production and disability and health care costs, was up to $29 billion.

Those findings shook up the business community and prompted the Business Roundtable to form an organization called The Leapfrog Group in an effort to set standards that would reduce those numbers. That group, of which IBM, Verizon, PepsiCo, Xerox and more than 100 other large corporations and unions are members, developed standards requiring hospitals to set up a computerized physician-order entry (CPOE) system, employ doctors certified in critical care in intensive care units and perform a minimum number of certain complicated procedures, such as coronary artery bypasses and high-risk deliveries.

"Right now purchasers are paying the same amount for care whether it's good or bad, and whether it's fraught with mistakes or not," says Suzanne Delbanco, Leapfrog's executive director. "And when mistakes happen, they have to pay to have them fixed" by subsidizing another prescription or a return trip to the hospital for the employee. Leapfrog estimates that implementing its three standards would save close to 60,000 lives each year in the U.S. and puts the worth of those lives at $9.7 billion.

For hospitals that make the grade, there are benefits. For instance, the four New York companies, working with Empire Blue Cross and Blue Shield, have pledged to pay a 4% bonus this year when paying for their employees' treatment, a 3% bonus in 2003 and a 2% bonus in 2004. The companies say they wanted to recognize the capital investment that hospitals need to make to adopt the Leapfrog standards. The bonus payments are expected to cost the companies $2 million over the three-year period, which is the amount they calculated they could save if hospitals comply with the Leapfrog standards. Leapfrog also plans to have employers reward hospitals for meeting the standards by publicizing their compliance, and directing patients to those hospitals. Currently, it has identified more than 230 hospitals nationally that meet at least one of its three criteria.

The "end game" is to give the employee the information necessary to choose the best provider, says Larry Becker, Xerox's director of benefits. "You know that if you go to a hospital that does less than 500 coronary bypasses, your chances of survival are 35% less. We want to get that information to get them to make choices about where they go." Says Delbanco: "You can get more information about a dishwasher than you can a hospital or doctor. Until we have a standard set of performance measures, we're all going to be operating in the dark."