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Paying for Healthier Employees, Not Just Health Care

June 19, 2009
Related Topics: Benefit Design and Communication, Featured Article, Compensation
In April, health insurer Cigna and pharmaceutical company Merck signed a deal that would tie rebates on diabetes drugs made by Merck to the health of patients taking that medicine: The more the patient improved, the greater the discount.

Such a contract naturally motivates Cigna to improve the health of diabetics while enabling Merck to sell more medicine. Cigna says it will pass these discounts on to its customers.

Employers have long bemoaned the fact that they pay more each year for health care services regardless of whether those services improve the health of employees. This alignment of incentives represents the evolution of performance guarantees in health care contracts.

Pioneered by employers, these contracts are helping to refocus the culture of health care so that instead of paying for a service, employers pay to improve a person’s health. While overall costs may not go down, these kinds of guarantees mean employers will be spending their health care dollars more effectively. Rather than paying for health care services, employers will be paying vendors only if they can show they’ve improved the health of employees.

“Clients at the end of the day want to pay the vendor for improved outcomes,” says Debra Gold, worldwide partner at Mercer in Chicago. “Performance guarantee means putting fees on the line based on results.”

Cigna’s contract with Merck and others that focus on the health of an individual or group have evolved over the past 15 years from a focus on administrative services to the thing most closely linked to rising health care costs and arguably most important to productivity and happiness: the health of the patient.

Guaranteeing the performance of drugs and services in contracts with vendors gained prominence in the 1990s as employers, faced with an employee backlash against HMOs, hoped to improve the administrative services of their insurance carriers.

In 1995, employers organized through the Pacific Business Group on Health banded together to wrestle from health insurance companies guarantees that the carriers would meet certain performance levels, whether it was quickly adjudicating claims or getting a customer service agent on the phone. Their contract put at risk $8 million; in the end, HMOs lost $2 million because of poor performance.

The effect was to force health insurers to start measuring their performance in order to improve it, an approach that has come to encompass not only administrative tasks but patient care as well.

In recent years, this trend toward measuring performance has been more evident in contracts with disease management and wellness companies, areas where return on investment for employers has been elusive. These management companies rightly tie their fees to the performance of their programs: For instance, a company can’t get paid unless it shows a reduction in the number of unnecessary trips employees and their dependents make to emergency rooms; or, the company gets paid based on an increase in the number of employees who fill out a health risk assessment.

The National Business Coalition on Health later developed a tool called eValue8 that helps employers evaluate the performance of health plans based on evidence-based medical standards. Likewise, academics are also developing ways to measure “consumer engagement,” defined as the ability of a person to manage their disease, so that disease management companies can be measured using a common framework.

“It’s a reflection [of] whether the plan has been successful at educating or motivating the individual to participate in self-care or risk reduction,” says Emma Hoo, director of Value Based Purchasing for the Pacific Business Group on Health in San Francisco.

“The Cigna-Merck contract is one of first indications of outcomes-based pharmaceutical contracting in the United States,” says Dana Felthouse, president of the Pharmacy Benefit Management Institute, a Scottsdale, Arizona-based research organization for employers providing pharmacy benefits.

The reason for the slow progress toward “outcomes-based” contracts is that changing people’s behavior is hard—and improving their health is even more difficult. Yet, because doing so is more meaningful than paying someone $200 to fill out a questionnaire about their health and lifestyle, health care experts say vendors should be expected to focus on achieving this goal.

A wellness company may get paid based on the percentage of employees they can get to fill out a health risk questionnaire, but this activity may do little to improve an individual’s health. On the other hand, improving a diabetic’s health is directly related to lowering their blood-sugar levels, which is relatively easy to measure, though hard to achieve.

These innovations in how health care is paid for is something proponents of the private, employer-based health care system talk about when conversation turns to health reform.

“I think [Cigna’s contract with Merck] speaks to the kind of innovation that we want to be able to preserve by continuing the role for the private marketplace for health plans, for PBMs and for employers who engage their services,” says James Klein, president of the American Benefits Council, a Washington-based lobbying group for employer health plans.

Cigna has experimented for several years with performance guarantees focused on the health of patients. These outcomes-based contracts come in a variety of forms.

Among its first performance guarantees several years ago was a promise to pay an employer if one of its employees had a heart attack despite taking cholesterol-lowering medicine. National employers with more than 10,000 people were eligible if they signed a three-year contract.

Cigna will send a $25,000 check to an employer whose employee has a heart attack, says Thom Stambaugh, Cigna’s chief pharmacy officer, “if you’ve done everything you can do and the medication did not bring cholesterol down.”

Another performance guarantee for asthmatics worked similarly. If an asthmatic taking an inhaled steroid as a maintenance drug still had an asthma attack that led to an emergency room visit, Cigna would pay the average cost of the visit—about $700—or a hospitalization, around $2,000.

Stambaugh says these contract guarantees deliver substantial value.

“Both are contracts aligned around improving outcomes through pharmaceutical therapy,” he says.

Cigna says the risk it takes forces the company to better manage people’s chronic illnesses. The company looks at patients’ medication use and lab tests. They use disease management specialists to help coach a person toward healthier lifestyles and increased drug adherence.

Gauging whether the interventions work is easy, Stambaugh says. “These are completely measurable,” he says. “When someone has a heart attack, there’s no issue with how you measure it.”

Mercer’s Gold, however, says a program that pays an employer for the heart attack of one of its employees doesn’t give an incentive to the employee to change his behavior. “It may help the employer participate in the program, but it doesn’t help the individual to make changes in their lifestyle,” she says.

Sixty-nine employers have these contractual arrangements with Cigna. None were willing to speak to Workforce Management about their experience, though Cigna said the health insurer has paid for “a handful” of adverse events.

Because the program requires a three-year contract, it may not be appropriate for employers with high turnover rates, Stambaugh says. Like other contracts, the guarantees are only helpful if the contract itself meets the health needs of an employer’s population.

“You have to understand your population and what are the cost drivers and health conditions that impact absenteeism,” says Hoo, the Pacific Business Group on Health director. “That will drive the kind of performance metrics you implement for your carrier or vendor.”

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