Health Costs: Good News At Last

By Amy Barrett and Michael Arndt, with Diane Brady in New York and bureau reports

Slower price hikes and higher copays have helped companies. Now they’re testing new ways to find more savings

Everyone knows health-care costs are spinning out of control, right? Well, not exactly. Here’s some surprising news: The growth rate of corporate medical costs is slowing significantly. For the 12 months ended in March, 2005, health insurance costs per hour worked were up 7.5% for private employers, according to the Bureau of Labor Statistics. Sure, that’s still well above the overall inflation rate. But it’s down from the 9.3% rate for the year that ended in March, 2004 — and well off the recent peak of 11.4% seen in mid-2002. Among the key reasons for the slower pace: a slackening of price increases on everything from hospital procedures to doctor visits and the shifting of a larger share of health costs to employees in the form of higher copayments and deductibles.

The question now is whether Corporate America can continue its run in taming those monstrous costs. Companies certainly would like to: After all, if healthcare costs had continued to soar at earlier rates, earnings for many of them would look far less robust today. Yet employers know there is a limit to how much of the cost burden they can shift to employees. Says David Scherb, vice-president for compensation and benefits at PepsiCo (PEP ) Inc.: “You can burn through the goodwill of your people.”

That’s why big players such as General Electric (GE ), Ford Motor (F ), Boeing, and others are rolling out a variety of approaches aimed at injecting more “consumerism” into the health-care system. The term encompasses everything from offering health plans that give employees a fixed sum of money to spend on health care to programs that encourage workers to use the most efficient hospitals and doctors. The goal: to make employees more discriminating consumers of health-care services. Says Blaine Bos, a principal at Mercer Human Resource Consulting (MMC ): “We are now focusing on making consumers aware of what things cost and encouraging them to take greater care in making decisions.”


Truth is, few things focus the mind like a hit to the wallet. From 2002 to 2003, the average deductible went from $300 to $500 a year, according to Mercer. Last year 64% of prescription-drug plans offered by employers used tiered copayment systems, up from just 28% in 2000. Under those arrangements, employees shell out lower copayments for generic drugs and higher fees for branded drugs. That has encouraged use of less costly generics.

At the same time, medical inflation has been slowing. The rise in the producer price index, a government measure that detects inflation at the corporate level, is slowing in key medical areas such as drugs and hospital stays. The expiration of key patents, along with the growth of tiered copayment programs, have led to the slackening of drug-price hikes, while hospital pricing has slowed in part because of technological advances that have cut the overall cost of some procedures by shortening hospital stays.

With their own costs still growing at 7.5%, however, employers can’t afford to stand pat. After all, that pace will face upward pressure thanks to forces such as an aging workforce and the increasing prevalence of expensive diseases like diabetes.


That’s why companies across the country are experimenting with a host of creative new ways to keep hammering away on health-care costs. Oshkosh Truck Corp. (OSK ), for example, has veered away from the old — and costly — health maintenance organization it used for its 4,500 nonunion employees. The plan’s low copayments encouraged doctor visits and contributed to the double-digit annual growth in Oshkosh’s health-care bill.

So in January, 2004, the company switched to what’s known as a consumer-driven plan. Under the new plan, annual physicals and other preventive tests such as mammograms and prostate cancer screenings are fully covered. After that, workers and their families receive a $1,000 annual health-care account. Any unspent portion can be rolled into the following year. But once that account is tapped out, workers are responsible for the next $1,500 of medical expenses. If expenses go beyond that, the company steps back in and will pick up 90% of expenses. Oshkosh is betting that the gap will discourage wasteful spending while still ensuring workers are covered for serious illness. Oshkosh Vice-President for Human Relations Michael K. Rohrkaste says a pilot test of the program showed costs going up in the high single digits — a big improvement over the double-digit increases the company saw with its HMO plan.

But for employees to become better health-care consumers, they need better information. Increasingly, insurers and big companies are filling the void. Two years ago a number of large employers, including GE, United Parcel Service (UPS ), and Ford (F ), linked up under a program dubbed Bridges to Excellence to identify the most efficient physicians to treat costly conditions like diabetes or heart disease. Physicians such as Dr. A. O’tayo Lalude in Louisville must show that they meet certain guidelines, such as conducting regular foot and eye exams on patients with diabetes. That helps cut down on the incidence of blindness and amputation that people with unchecked diabetes suffer. If doctors meet the program’s requirements, the participating companies will pay a $100 annual bonus per employee and encourage workers to use those physicians. For Lalude, who figures he has close to 100 patients from local units of the companies sponsoring the program, “it could amount to real money.”

While Bridges to Excellence is still young, early results are encouraging. A study in one of the four markets where it is being tested found that the average annual cost to treat a person with diabetes was about 15% lower for doctors who participated in the program vs. those who did not. One reason: fewer hospitalizations. Bridges to Excellence is now being expanded to include back disorders and cancer. “We don’t know that quality always saves money,” says Dr. Robert S. Galvin, director of global health care at GE. “But we know that for diabetes and heart disease it does.”

That same approach is being used to go after the notoriously inefficient hospital system. A group of big employers and insurers founded the Leapfrog Group back in 2000. The idea: to identify hospitals that meet criteria such as moving toward computerized systems for ordering drugs, which reduce the risk of dangerous medication errors. Fewer medical errors, they bet, would mean lower costs. Health plans and insurers now post that information on Web sites in an effort to show employees which hospitals have the highest quality. And under a 2002 contract with machinists and engineers, aerospace giant Boeing Co. (BA ) agreed to pay the entire cost of a hospital stay after the deductible instead of the normal 95% if workers use hospitals that use Leapfrog standards. The program is too new to know whether it can save money, but experts are optimistic. University of Washington health economics professor Douglas Conrad has estimated that computerized orders for drugs alone could save $9 to $16 per day for a hospital stay.


To keep folks with chronic conditions out of the hospital in the first place, more companies are also turning to operators such as Nashville’s American Healthways Inc. (AMHC ), which has a booming business providing disease-management services. Under these programs, companies teach employees suffering from costly or chronic conditions such as asthma, diabetes, or heart disease how to better manage their health with improved diet, exercise, and medication. Since 2002 home-improvement retailer Lowe’s Cos. (LOW ) has had such a program in place aimed at workers with diabetes and heart problems. The company’s annual medical and drug costs for employees enrolled in the program have fallen by an average of 7%, Lowe’s says.

Of course, companies with healthy employees may be best placed to save medical dollars. That’s why PepsiCo, American Standard Cos. (ASD ), and others have launched ambitious programs to identify workers at risk for major health problems — and prod them to clean up their acts. At PepsiCo, employees can fill out a health appraisal that looks at everything from their cholesterol levels to their family medical histories. An outside consultant reviews that information and evaluates their chances of developing heart disease, diabetes, and other ailments. Those at high risk can tap health-care coaches paid for by PepsiCo. Some 16% of the company’s 50,000 employees now work with a coach.

Among them: Roger W. Babb, a 45-year-old manager in Frito-Lay Inc.’s (PEP ) Fresno (Calif.) office. Last fall, when Babb signed up for the program, he weighed 289 pounds, had sky-high blood pressure, and was borderline diabetic. Initially he filled out the health appraisal just to get the $100 PepsiCo offered to every employee who did. But within months he got serious. With the help of his coach, who called him monthly to offer encouragement and tips on diet and exercise, as well as daily e-mail messages from the Internet health site WebMD, Babb has dropped 47 pounds. His blood pressure and blood sugar are back to normal, too.

Babb’s case sounds like an all-too-rare victory for lifestyle change. Such programs can be costly, with an uncertain payoff. But employers have no choice, insists Pepsi benefits guru Scherb. “Sooner or later you come to the conclusion that you have to help people stay healthier,” he says.

That’s an ambitious goal — but one worth shooting for when the alternative is a return to runaway health-care costs.

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