Employee health care costs have increased 9% to 12% annually in recent years, far outpacing inflation. Those costs are expected to double within five years.
Since health care expenses are already equal to half of the after-tax profits for the average corporation, the cost of health care is threatening to drown many employers and their top executives. What is causing these dramatic increases?
The list of culprits is long, but the top drivers are: baby boomers reaching the age where health problems surface; the introduction of exciting (but costly) drugs and medical procedures; and manageable health risks such as obesity and heart disease.
While we can't stop the aging process and don't want to limit advances that lead to better treatment and potential cures, we can address controllable health risks. Supply-side strategies for reducing costs, such as promoting HMOs, shopping insurance plans and squeezing providers, have all reached the point of diminishing returns, so it's time to consider new approaches for demand-side cost management.
I believe that an integrated, comprehensive approach to preventive health strategies offers the best line of attack in bringing health care costs back in line with the slow growth of inflation.
Preventive health
Addressing controllable health risks presents a very large opportunity. As early as 1993, an article in the New England Journal of Medicine reported that 70% of our medical problems are potentially modifiable and many were due to poor lifestyle choices. Today, preventable illness accounts for close to 90% of all health care costs.
To put the opportunity for prevention in perspective, imagine focusing efforts on reducing some portion of health care costs.The table below shows that the impact of making a 20% reduction in supply-side strategies, like shopping claims administration, is quite low.
However, a 20% reduction in demand or controllable risks has a significant 14% impact. The irony is that nationally only 5% of health care dollars go to prevention; 95% goes to treatment!
Of the top 10 leading causes of death virtually all are considered preventable or manageable.
After researching prevention strategies suggested by such organizations as the American Heart Association and the American Cancer Society, I tabulated the results to determine how many methods of prevention exist and how common the illnesses are among those top causes of death. I found that a handful of preventive strategies can have a tremendous impact on what is driving the death rate.
Demand-side approaches
Some of the approaches to demand-side management have merit, but are strikingly limited in their appeal and, therefore, their success. Shifting costs to employees to promote healthier behaviors and lower costs also has value, but there are limits to what employees can bear before they drop coverage or jump to an employer that offers better benefits.
Although wellness or preventive health programs have been around for many years, scattershot strategies like health fairs and "lunch and learns" have little global impact.
Consumer-driven plans with high deductibles and health reimbursement arrangements provide a valuable carrot and stick to motivate employees to take responsibility for their own health. But employees need more than motivation; they need guidance and tools to help them change behaviors.
The utilization rates of online medical help lines and toll-free call centers are generally very low. When employees do search for information, much of the data they need to be a smart shopper, such as cost versus quality for health care providers, is not yet available.
The result? Employees still have the health risks and simply avoid treatment until it's expensive. Clearly, piecemeal and fragmented approaches can't make a dent.
An integrated prescription
What's needed is a comprehensive, systematic approach to improving health and reducing demand for medical claims.
These approaches always include a health risk assessment and targeted interventions plus other options, including biometric screening , triage (identifying participants with health risks and offering help to reduce those risks) self-care (helping employees evaluate family medical problems and eliminate unnecessary doctor visits), disease management and incentives for healthy behaviors.
An analysis of Hays Companies' customer data indicates that a systematic approach to health improvement can attain a return on investment of 3:1 to 6:1. Unfortunately, only 20% to 30% of eligible employees typically take advantage of a voluntary program, and most of them are already healthy.Therefore, voluntary programs lack the power to avoid double-digit health cost increases.
Participation requires incentives
Case studies from Interactive Health Solutions, in Arlington Heights, Ill., show that incentives can easily quadruple participation and double the return on investment.Some reward employees who accomplish steps in the program; others provide monthly premium discounts.
Rewards are usually based on participation, not meeting hard objectives like "losing 50 lbs."The hard numbers can be a disincentive to employees, but may reward those using lifestyle and/or pharmaceutical means to reduce their health risks.
Incentives usually range from $50 to $250 per participant per year, and achieve 50%-80% participation rates.Some Hays Companies' clients have reached 95% participation. A less expensive, more successful (and controversial) approach is to require employees to participate in some parts of the health improvement program to receive employer-based health insurance.
Employers can require the completion of a health risk assessment or participation in a program. Although requiring the whole program is usually too aggressive for most employers, requiring the HRA by itself is not. In fact, it's consistent with how life insurance is handled.
Mandatory cost controls When employers motivate the majority of employees to participate in a health care plan, the cross-section of participants becomes representative of the entire employee population.As a result, significant health risks can be uncovered and reduced, and many claims will be avoided.
Mandatory programs with a stick, not a carrot, usually pay for themselves in year one, and yield a 6:1 ROI or better in subsequent years.
The chart above shows how one employer has avoided two thirds of the regional average cost increase since beginning a program in 1997, and another is running below its 1997 baseline cost.
Hurdles
The biggest hurdle for employers is the extra $1 to $20 per employee per month a health improvement program costs. However, even the most expensive programs are less than 5% of what most companies are spending now. And if a 5% investment pays for itself in the first year, and six times over within a few years, it's smart money!
What's riskier: staying on a 15% per-year cost curve that's set to increase costs 100% in five years, or investing 5% annually to get on a single-digit curve?
Employees' greatest objection to a health care management program is the fear of letting the company "in their business." However, both the employer and the third-party preventive care provider would have to conspire to violate HIPAA for the company to gain access to individually identifiable health information.
On the other hand, well-communicated health improvement programs help recruitment, retention, morale and productivity. Successful employers convince employees that health care costs are everyone's problem and require a team effort to overcome it.
Health care costs have become a strategic issue of great national concern. The supply-side strategies of the past decade have run their course, and cost shifting to employees has limited potential.The big opportunity is the integrated, comprehensive approach to addressing the poor lifestyle choices that drive 70% of medical claims.
About 95% of employers now claim to have a wellness program of some sort, and many include some part of the services described above.Yet, only a very small percentage of employers have seized the real opportunity that exists with an integrated and comprehensive program. Until the business community recognizes the value of investing in preventive care strategies, the cost of health care will continue to soar.
Kasen, senior executive vice president in the New England office of Hays Companies, has 17 years of group benefit consulting experience, including assessing health and welfare programs and developing and implementing benefit strategies.
