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Can CEOs Find Relief From Skyrocketing Health Costs?

A study of firms in four industries finds that a new type of wellness program that stresses “accountability” and uses financial incentives and individual coaching to improve employee health habits can lead to a sharp reduction in health claims and a boost to employer bottom lines.

A study of firms in four industries finds that a new type of wellness program that stresses “accountability” and uses financial incentives and individual coaching to improve employee health habits can lead to a sharp reduction in health claims and a boost to employer bottom lines.

This may come as welcome news to many CEOs, given that employee health costs have now become the third largest expenditure for U.S. companies today, after wages and legally-required benefits. And the cost of such insurance is rising sharply — up 114 percent just in the last decade —  and beginning to erode the financial health of many businesses.

Skyrocketing health costs for business have multiple causes, of course, including a health care system largely insulated from market forces. But another cause is the declining health of the American worker. For every 100 employees today, 25 have cardiovascular disease, 20 have high blood pressure, 38 are obese, 21 smoke, and 44 suffer from stress or depression. This is not only a terrible waste of human capital, but an enormous burden on the bottom line as well.

But the good news, according to the new study, is that these “accountability-based” wellness programs can actually reduce health costs for the majority of a firm’s employees, healthy and unhealthy alike, and result in a 4 to 1 return on a company’s investment in them.

In an “accountability-based” wellness program, participants pay a reduced employee contribution towards their health insurance premium — say, $50 per month — whereas the contribution for a non-participant (who essentially pays for the program) might be $100 monthly. Participants identified during their initial assessment to have health risks — high blood pressure, for example, or obesity — then have to work with a health coach and make lifestyle changes if they want to continue receiving the lower premium. No one is required to be free of health risks, only to try to reduce those risks by working with a health coach to establish a healthier lifestyle.

The use of incentives is not new in the insurance field. Many home and auto insurers, for example, offer discounts to those who take a driver safety class or install a home security system. In this case, however, companies can incentivize healthier employees — and lower health costs as a result — by reducing premiums for those who work at creating a healthier lifestyle.

Previous studies have demonstrated that wellness programs can reduce employer health costs, but by how much has been the subject of great debate. Citibank’s Health Management Program reported an estimated savings of $4.50 in medical costs per dollar spent on the program. But another study reported by the Michigan Business Review found only a 1.8 to 1 return on the wellness investment. According to the risk management firm Aon Hewitt, most employer-based wellness programs generate an ROI of between $3 to $6 on every dollar spent.

The problem with many of these studies, says Harvard health economist Katherine Baicker, is that they “lack and adequate control group” and focus only on a small self-selected sample of healthier-than-average individuals already pre-disposed to join a wellness program.

Professor Baicker’s own study, conducted with Harvard colleagues David Cutler and Zirui Song and  reported in the February, 2010 issue of Health Affairs, solved the control group problem and is thus considered to be the most rigorous to date. In that study, Baicker and her team found that “Medical costs fall by about $3.27 for every dollar spent on wellness programs, and absenteeism costs fall by about $2.73 for every dollar spent.”

Orriant’s multi-company study, however, was the first to solve the self-selection bias problem and examine the impact of a wellness program on the health claims of the majority of the employee population, healthy and unhealthy alike.

We examined actual insurance claims over four years at four very different employers — a nationwide automotive dealer, a regional grocery chain, an industrial equipment supplier, and a county government. More than 64 percent of the insured adults, employees and spouses included, eventually participated in the program — an unprecedented participation rate for a wellness program and a testament to the appeal of the financial incentives and health coaching offered.

This high participation rate, in turn, meant that the health status of wellness participants was similar to that of the population at large. Indeed, 68 percent of participants had health risks great enough to require them, under our “accountability” model, to work with a health coach.

We compared actual historical claims prior to the wellness program’s launch to claims afterwards to determine the ROI. Outlier claims of more than $30,000 each — which represented only  7 percent of the four year, four-employer total of $63,311,488 in medical claims — were removed to eliminate any bias created by one-time medical events. Children’s claims were also eliminated from the study because they were not involved in the wellness program intervention. Employees who did not participate in the wellness program served as the control group.

The results showed a significant financial benefit to each company’s bottom line. The total paid claims per wellness participant dropped to $2,269 compared to $6,187 for non-participants. Emergency room claims, hospital claims, pharmacy claims — all showed a steady decline among wellness participants versus a steady rise in the claims of non-participants.

In fact, in spite of the exponential growth in claims by the non-participants as shown in the graphs below, paid claims for participants and non-participants combined still fell by 1.3 percent just between 2009 and 2010, During that same time, claims nationwide rose 6.9 percent. And the biometrics of the at-risk adults improved every year at all four companies.

Brigham Young University and the University of Utah are now reviewing the study results, and more research on the effect of wellness programs on employee health costs is clearly needed. But already a growing body of evidence — including this new Orriant study — suggests that employers may finally have found a powerful tool to rein in their skyrocketing health costs.

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About Darrell Moon

Darrell Moon is the CEO of Orriant, a provider of employee wellness programs.