Managing Health Costs Four Case Studies

April 26, 2004


ompanies have used a variety of strategies to better manage mounting health-care costs. At Fall River, the small family-owned company ultimately increased co-payments after a strong communication effort. Highsmith, a mail-order distribution company, saw premiums increase 53 percent, and gave employees financial incentives if they participated in a health screening. The baby boomers at Nexen became more active consumers. Union Pacific contained its health-care costs using a combination of health-screening and anti-smoking programs.

Fall River Group

   Summary: Fall River Group, a privately held midsize company that makes brass castings, shifted to self-insurance several years ago. It continued to face mounting health-care costs at a time when remaining competitive was essential. In order to retain talent in a low-profile industry, the company set up a consultative process with a core group of employees called the Shop Committee. By timely and accurate communication of the financial constraints, it was able to persuade employees to increase their co-pay for deductibles and prescriptions.

   The Challenge: How does a company confronted with rising health-care costs and an inability to absorb the additional expense retain its employees while increasing their health-care premiums? The Fall River Group, a privately held, family-run manufacturer of brass castings with 205 employees, chose employee communication and input to address these issues.

   Increases in health-insurance costs had already prompted management at the Fall River Group to switch to self-insurance, to save money, several years ago. However, rates had begun to rise again and now stood at $5,600 per employee, a 14 percent increase over the previous year. To attract and retain the talent it needs to remain competitive, Fall River has historically maintained generous benefits for its workers. Despite this history, management knew it would have to share more of the insurance costs with its employees, like so many other companies in the area. According to CFO Kevin Lamp, the company's practice of open and two-way communication made the changes easier for employees to understand and accept.

   The Solution: For the last 20 years, Fall River has maintained employee communication and input through the Shop Committee -- a group representing manufacturing employees that addresses everything from workplace safety to personnel matters. Each of the seven different manufacturing departments elects one representative to the Shop Committee for one- or two-year terms. It was through this committee that management began the process of health-care-benefit education. Changes to benefit plans were conveyed to the Shop Committee, who in turn shared the information with their various departments. The Committee always has the option of requesting additional information prior to dissemination or, if the facts are clear, supporting a change as presented by management.

   The facts presented to recommend shifting some of the cost of health-care benefits to employees clearly supported management's proposal. According to Lamp, once the cost-trend data had been clearly presented, it was obvious to most that something had to be done. Ultimately, Fall River decided to increase the co-pay for non-generic prescriptions to $25 from $15 and to increase the payroll deduction by 30 percent for single coverage and by 24 percent for single-parent and family coverage.

Key Success Factors

   Advance Planning. Management usually begins the benefits-review process four to six months prior to its June renewal deadline. While the company is self-insured, its broker and third-party administrator provide the timely service needed to begin this advance preparation. Without this coordination, it would be difficult to exchange information between the Shop Committee and management within the time constraints of a renewal process.

   Shared Financial and Company Information. Employees at Fall River are well informed about the financial performance of their company and understand the fundamental economics of their company's profitability. This financial insight provides perspective.

   Motivation to Maintain the Quality of Benefits. Fall River has a need to attract and retain top talent to work in the foundry. Since this environment is not necessarily viewed as the most glamorous place to work by prospective employees, Fall River has a history of offering high-quality benefits to its employees. Management was reluctant to erode this quality.

   Good Vendor Relationships. Before becoming self-insured, Fall River had difficulty obtaining meaningful and timely data on past claims, historical utilization and the costs of health-care services consumed by its employees. Obtaining such quality information is critical to educating the Shop Committee and its employees on what drives increases in health-insurance premiums. Fall River's broker has been critical to defining and obtaining this information from the third-party administrator.

   While well-planned information sharing and employee communication take time, Lamp and other executives at Fall River would have it no other way. As Lamp puts it, "You can't just throw employees a booklet and say, 'Here's the deal.' You're hurting the whole program by not educating them."

SOURCE: Reprinted by permission from Research Report: What Works Now: Employer Strategies and Tactics for Controlling Health Care Costs. Copyright IOMA.

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   The Challenge: In 1990, Highsmith's health-insurance premiums increased 53 percent as a result of the previous year's claims, which included two premature births and a case of spinal meningitis. In a company where the average employee tenure was 12 years, management knew that it had to be creative in finding a solution to this problem. Highsmith, founded in 1956 by Hugh Highsmith, is the leading mail-order distributor serving schools and libraries. Highsmith employs 215 workers and is based in Fort Atkinson, Wisconsin. Being in the paper-thin-margin world of the distribution business meant that shopping for a lower-cost provider was essential. However, executives suspected that something more fundamental was required.

   The Solution: Bill Herman, vice president of human resources, concluded that since high premiums come from high claims, and since sick and unhealthy workers cause high claims, the solution was to reduce the number of sick and unhealthy workers. An employee committee was formed with the goal of designing a health-promotion program focused on risk-based incentives. To illustrate their commitment to the committee, employees had to sign a written agreement obligating them to two years of service.

   The initial plan offered financial incentives to workers who reduced specific risk factors, such as weight, high blood pressure, cholesterol, etc., according to certain milestones. The strictly volunteer program permitted employees to have 80 percent of their premiums covered if they showed progress on risk factors, compared to the company-wide plan, which covered 60 percent of health-insurance premiums. Prior to a change in HIPAA regulations, the risk-rating system was based on tracking actual health-test and screening data from individual employees. In response to the regulations, the program was adapted by basing incentives on participation in various health and wellness activities such as requiring all employees to participate in an annual 90-minute health screening; mammograms for women between the ages of 40 and 50; complete physical exams for both sexes over 50 and a prostate screening for the men; and pre- and post-natal care for pregnant women. The financial incentive could result in a $1,000 savings for an individual worker whose benefits were covered 80 percent versus the standard 60 percent.

   The impact on Highsmith's bottom line was astounding. In 2002, its premium increased 2.9 percent, compared with 12.4 percent for companies with 200 to 999 workers. In 2003, its premium increased 3.1 percent, compared with another 12.4 percent gain among employers in its class size, saving Highsmith roughly $90,000 in additional premiums.

Key Success Factors

   Adaptability. When HIPAA regulations changed, the program was adapted rather than abandoned. Additionally, the changes occurred incrementally, over a period of time, as Herman and the committee learned by doing. For example, to provide exercise options despite the absence of an on-site facility, they offered regular exercise programs in a cleared-out lunchroom.

   Cultural Shift. Herman also noted that the changes were part of designing a unique employee-centric culture that integrated wellness with a more comprehensive approach to employee development. It was also critical that this strategy was strongly supported by CEO Duncan Highsmith (son of the company's founder).

   Motivation to Maintain Its "Rich" Plan. In 2002, total cost per employee came to $5,840. Rather than cut the plan, Highsmith worked to offset the cost of what it wanted -- for example, Wisconsin's workers' compensation insurance cost increases or decreases based on experience. As a result of its performance, Highsmith saves 15 percent on its workers' compensation insurance. Additionally, the company has been eligible for an average of 16 percent rebates, based on experience, for the past 10 years. In 2003, the savings were $18,500.

   Low-Cost Options. It has taken over 10 years for Highsmith to develop the program currently in effect. In the early years several tactics were used to foster and encourage change. Herman suggests changing meeting refreshments to fresh fruit and juice from donuts and cookies; offering water wherever coffee is available; and establishing what they call the "Twinkie Tax" by increasing the cost of traditional high-fat snacks and using the profits to reduce the price of alternative healthy snacks. Last, Herman suggests using speakers' bureaus that can provide experts on nutrition and exercise.

   Highsmith's innovative culture and business practices have been profiled by Inc. magazine, NBC Nightly News and the Wellness Councils of America, among others.

SOURCE: Reprinted by permission from Research Report: What Works Now: Employer Strategies and Tactics for Controlling Health Care Costs. Copyright IOMA.

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Nexen Group

   The Challenge: Dan Conroy, having been in human resources for 16 years, five of those as director, had been coping with double-digit health-care increases during a large part of his tenure. He had already tried changing the plan design by adjusting the co-pay and increasing premiums and deductibles to maintain the current level of coverage for the very close-knit staff. However, as the increases continued, an alternative solution had to be adopted.

   With its headquarters in Vadnais Heights, Minnesota, and its manufacturing facility in Webster, Wisconsin, Nexen Group is a leading manufacturer of brakes, clutches, torque limiters, overload-protection devices and control systems for a variety of industrial applications in the packaging, machine tool, material handling, automotive and textile industries. Nexen's 150 employees are mostly baby boomers who have long tenures and who are computer savvy. Consistent with the demographics of a manufacturing plant, 66 percent of Nexen's staff has attended technical college, while approximately 17 percent have completed high school and college, respectively.

   The Solution: In a company where a 16-year employee is considered a "new kid on the block," management wanted a plan that continued to provide "rich" but affordable coverage. When Nexen's broker presented consumer-driven health care as an option, Conroy saw a solution in making employees medical consumers and giving them a share of the risks and rewards of having medical coverage. In general, when people pay more, they tend to become more interested and involved. The plan was implemented in three phases.

Step 1: Conroy began the information process one month prior to enrollment. At a regularly scheduled plant meeting they showed a "nuts and bolts" video, provided by Definity Health, on how the program would work.
Step 2: At Nexen's annual Benefits Fair, Definity Health was on hand to explain the enrollment process and the specifics of the program.
Step 3: At the re-enrollment meeting, Definity Health representatives were on hand for one-on-one discussions with the staff.

Sample Coverage

Option 1
Option 1
Personal Care Account
Single $1,000
$ 500
$ 98.44

Employee +1

$ 750
Family $2,000

   The program started on June 1, 2002. There were no savings in the first year, which meant that management buy-in had to be long term. In year two, however, Nexen realized a 7 percent reduction in medical costs. Vision, dental, etc. are separate, stand-alone programs. Going forward, Conroy expects a slight reduction in the savings due to changes in the health of Nexen's employees.

Lessons Learned
   Initially, employees received quarterly statements that indicated either a surplus in their personal-care accounts or a balance due. If employees overspent, this bill could be significant. To lessen the impact, Nexen recently changed to monthly reports. Additionally, after six months they would have directed employees to the depth of consumer information, from Definity Health, available on the Web, rather than in the second year. While it was important to effectively communicate the design changes to the staff, once they became comfortable, the consumer information on the Web would have been useful sooner rather than later.

Key Success Factors

   Human Resources Experience and Management Support. The human resources director had the benefit of experience, having tried other approaches to controlling health-care costs, when he presented consumer-driven health care to senior management. Long-term buy-in from senior management was essential since there were no cost savings in the first year.

   Early and Varied Communication. Despite the fact that communication in a small company occurs almost daily, Nexen started the information phase of the consumer-driven health-care rollout one month prior to enrollment. To convey the message they used video, a benefits fair, paper and face-to-face communication. Conroy noted that he was pleasantly surprised at how quickly staff grasped the concepts.

   Choosing the Right Vendor/Partner. Definity Health, which started offering consumer-driven health plans in October 2000, provided Nexen with information as well as personal support. Additionally, Conroy noted, Definity's consumer Web information was very informative.

   According to Conroy, changing to consumer-driven health care had a significant impact on employees' becoming more savvy medical consumers who chose generic versus brand-name Rx and who researched pill-splitting to lower prescription costs; questioned doctors on the necessity of lab tests; visited emergency rooms less often; and became more conscious of the number of physical-therapy visits they actually needed. Most employees did not perceive themselves as users of health care and took many of the "standard" services for granted prior to becoming active health-plan consumers.

SOURCE: Reprinted by permission from Research Report: What Works Now: Employer Strategies and Tactics for Controlling Health Care Costs. Copyright IOMA.

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Union Pacific Railroad

   The Challenge: In 1987, Union Pacific management realized that without further investment in the health and well-being of their employee population, health-care costs might exceed the projected annual increases. Union Pacific's employees are 95 percent male, 90 percent union, with smokers representing 40 percent of staff in 1990. Furthermore, they are on call 24/7, they are spread across 23 states, and their average age is expected to increase to 48.4 within the next 10 years.

   Additionally, research indicated that if staff levels grew by the expected 500 per year, seven major health-risk factors would worsen among their employees without intervention. The good news is that because of their specific demographics and the long-term dedication to their health-promotion program, they are often able to obtain grants to fund the various pilot programs and studies that support their cutting-edge decisions regarding employee wellness (source: Wellness Councils of America).

   The Solution: In 1987, Union Pacific established exercise as the cornerstone of its health-promotion program and built an 8,000-square-foot fitness center at its Nebraska headquarters. To accommodate the track-maintenance workers and other mobile staff, boxcars were converted into rolling railway gyms.

   In 1990, a lifestyle claims analysis revealed that 29 percent of health claims were lifestyle related. Union Pacific engaged in a pilot risk-identification/intervention program from 1992 to 1994 that identified and targeted four risk factors of cardiovascular disease for reduction: blood pressure, weight, cholesterol and smoking. The programs included employee assessment, analysis of assessment results, targeted intervention and follow-up. To improve the rate of success of the smoking-cessation program, for example, Union Pacific incorporated a change in its culture via healthier corporate policies. For example, in addition to promoting the standard cessation methods, including nicotine patches and gum, Union Pacific initially restricted where employees could smoke in the building.

   The next policy step was to prohibit smoking in company buildings, company cars and locomotive cabs. Additional tightening of the policy is expected over the next 18-month period. As a next step, Union Pacific participated in a pilot program entitled "Butt Out and Breathe." This study looked at whether adding a pharmaceutical component to the other programs increases the quit rate. The results from this pilot prompted Union Pacific to change its program to ensure that pharmacological assistance was available for employees. The smoking program's results thus far are impressive, with a reduction to 26 percent of staff in 2003 from 40 percent in 1990.

   After a 2003 study focusing on weight, Union Pacific extended the pharmaceutical component, similar to the "Butt Out" campaign, to this risk factor. In conjunction with pedometers, telephonic support and behavioral modification, this study will look at whether adding pharmacological assistance to the existing efforts will increase the program's success.

Key Success Factors

   Senior Management Support. Senior management, including the CEO, had the patience to see a program through from pilot phase to follow-up. Management is provided with regular reports on the prevalence rates of all the risk factors to gauge success/failure of a program.

   Consistent and Committed Program Management. The current program manager has been with the company since the program's inception in 1987.

   Employee Cooperation. Building trust and confidence in the union leadership so that health information would be freely provided was critical. The success of the grant-sponsored studies depends on getting employees to participate. Union Pacific employs a contractor that collects the data and prepares the studies, putting a layer of anonymity between the employees' health records and Union Pacific management.

   Open Communication. Union Pacific's Health Track managers work with union leadership as new programs are developed, to get their buy-in and support. By keeping them informed, reinforcing the blind-study concept and connecting the success of the programs to financial incentives, a strong partnership has been developed.

   Quantifiable Results. Three lifestyle claims analyses, conducted over an 11-year period, showed a decrease in lifestyle claims to 18.8 percent in 2001 from a high of 29 percent in 1990, when the first study was completed. The savings associated with Health Track programs, compared to what would have been spent absent the wellness programs, amounted to approximately $50 million in 2001.

   Future Plans
Next on the horizon is a study that will look at productivity losses associated with behavioral health. Management has also extended the wellness concept to the families of employees. In 2003, Union Pacific agreed to be part of the "Healthy Kids" project, a community-outreach study that will examine what impact the work environment has on childhood obesity. Union Pacific will be one of the test sites for this program in Omaha. Finally, Union Pacific is expanding its current fitness center to include 19,000 square feet of space in its new office location, replacing the original 8,000-square-foot space built when the program started in 1987.

SOURCE: Reprinted by permission from Research Report: What Works Now: Employer Strategies and Tactics for Controlling Health Care Costs. Copyright IOMA.