Cut Costs by Customizing Healthcare

Value-based insurance design focuses on return on investment, and asks employees to take more responsibility. Think carrots, though, not sticks.

One of the ironies of the U.S. healthcare system is that no one wants to pay for care. Out-of-pocket costs becomes a barrier, even to people who can afford it. The rapid spread of high-deductible health plans hastened this. Fewer people went to the doctor or had elective procedures during the recent recession. 

This trend was expected to reverse itself as the economy improved. It has not. 

Although economists disagree on why, the No. 1 suspect is high deductibles. Annual deductibles that exceeded $1,000 used to be considered on the high side. Today, the average employer-sponsored insurance deductible tops $1,100. This compares to about $600 in 2006.

A landmark health insurance experiment by the Rand Corp. in the 1970s and 1980s split people into groups that included some who paid nothing out-of-pocket for healthcare and others who paid up to 95 percent. As the out-of-pocket cost sharing grew, healthcare usage fell. People would forgo needed and unnecessary care in roughly equal amounts. More recent research has confirmed this.

According to a 2011 Rand study, health spending for families with a deductible of at least $500 per person dropped 14 percent, compared with those in traditional plans with lower deductibles. 

Companies want employees to get the care they need, but not much more than that. Some are using what health-policy wonks call value-based insurance design. Essentially, companies calibrate out-of-pocket spending by employees with the value of medical services to get a better bang for the healthcare dollar. 

Let’s say a standard deductible for an employee is $40. An employer could waive that for an office visit to control blood pressure for diabetics, which is a fraction of the cost of a possible heart attack or stroke. Likewise, the company could raise the deductible to $80 for a high-tech brain scan for dementia, which is considered a low-value procedure.

Most businesses shy away from this insurance design for several reasons: Short-term costs may go up, employees might go to the doctor more often, and the company is picking up most of the entire tab for certain services. There is not comparative clinical evidence for cost-effective medical services. They also are concerned that employees will respond with suspicion, rather than seeing it as a way to keep people healthy at a lower cost.  

Well-executed insurance design creates winners all around. Employers get a healthier workforce, less absenteeism, and lower medical costs. Providers benefit by having patients that are more likely to follow prescribed treatment. Employees pay less for better health. 

Some U.S. employers have been successful with the strategy. Software and hardware manufacturer Pitney Bowes provided free asthma medicine for its employees, yet its costs for asthma patients declined by 19 percent. The city of Asheville, N.C., waived co-pays for employee diabetes care. While its prescription-drug costs rose, its medical costs declined over a five-year period. And Mayo Clinic employees paid more for specialty-care physician visits and other services such as imaging, testing, and non-hospital procedures, while prevention and primary-care visits were free. High-cost care has declined for the past four years.

The federal government has backed insurance design. Designers of the Affordable Care Act specifically cited VBID research when they included a provision that made evidence-based preventive services free. A 2012 Congressional Budget Office report concluded that increased use of prescription drugs reduced Medicare spending on other medical services.

It is hard to know how extensively VBID is being used. Benefits consultant Mercer found in a 2008 survey that about one out of five companies with at least 500 employees were following the approach. According to a 2007 Mercer survey, 80 percent of U.S. companies with at least 10,000 workers were interested in adopting the model in the next five years. 

Many Americans with private insurance are accustomed to a tiered drug plan for pharmacy benefits. The consumer pays the least for generic drugs, higher prices for preferred brand-name drugs, and the highest prices for nonpreferred brand-name drugs. However, these are based on cost rather than effectiveness. 

Seven Dallas-Fort Worth employers, with a total of 67,000 employees, launched their own experiments that included VBID in August 2010. Dubbed the Texas Health Strategy Project, the group received funding from the pharmaceutical company Pfizer and guidance from the Dallas-Fort Worth Business Group on Health and National Business Coalition on Health.

Each participant sized up the health of its employees, fingered what seemed to be a pressing problem, took action, and met with each other periodically to share data and war stories. All seven tasted success—some more than others.

Dallas-based Energy Future Holdings Corp. focused on subsidiary Luminant. About three out of four of its employees had not seen a doctor in three years. An alarming number were not surviving heart attacks and strokes, resulting in life insurance claims that exceeded the industry average.

Part of the problem was that many of its worksites were located in remote rural areas that lacked accessible healthcare. So EFH decided to bring healthcare to them.

The company created a mobile healthcare clinic, called MobileDoc. The clinic spends a week at a time at each of its East Texas mining sites. 

“Guys would not go to the doctor regardless of what the problem was,” says Cyndie Ewert, EFH’s vice president of total rewards and human resource services. “If they did, they would have to travel as much as an hour and a half to get there, and then they had to find someplace to fill a prescription.”

MobileDoc exceeded its goals in its first year, with nearly half of its employees using the clinic staffed by a nurse practitioner, medical assistant, and an emergency medical technician. The company estimated it had a $1.92 return on investment for every dollar spent, based on reduced cost of treatment, time away from work (“Now it takes a half-hour, rather than half a day, for healthcare,” Ewert says), and bringing health risk factors under control. Of the employees who were screened, more than one out of three employees improved their health by shedding risk factors—triple the rate of those who acquired new ones that year.

“I am proudest of the fact that we are connecting with employees and getting them to pay attention to their health,” Ewert says. “This is still a journey but we made good inroads. In the past, they didn’t think they needed to worry—‘I’m a man. I feel fine. I don’t need to go to the doctor’—but now they see the value.”

The city of Mesquite used a combination of incentives and penalties to coax employees to receive physicals, stop smoking, and lose weight.

Employees who do not get a physical pay more for their insurance premiums. The result: More than nine out of 10 get a physical.

Tobacco users—including spouses on family plans—pay $20 more per month unless they visit the work-based health clinic for a tobacco-cessation consultation. If they attempt to quit, they receive up to $500 a year for tobacco-cessation medication. Half of the employees who said they smoked in 2012 declared themselves tobacco-free in 2013. 

The city also offers a free three-month Weight Watchers membership for employees and spouses, renewable if they achieved at least a 5 percent weight loss. About 5 percent of employees participated and half of those continued the program on their own. 

Human Resources Director Brian Dickerson says he finds sticks work better than carrots. He also credits the city’s on-site medical clinic for keeping its annual medical cost increases to about 3 percent over the past six years.

Alice McAbee, vice president of human resources for Dallas-based Haggar Clothing Co., says employees seemed to be skimping on medication after the company converted its entire 700-employee work force to high-deductible health plans.

One month after chief executive officer Michael Stitt took over in April 2012, the company removed the deductible and co-payments for generics or preferred brand-name drugs. Pharmaceutical costs shot up 47 percent. However, annual medical claims costs dropped by 6 percent.

“It is hard to say [there was a cause-and-effect] emphatically, but the evidence is pretty clear,” McAbee says.

DFWBGH Executive Director Marianne Fazen encourages firms to pull together work force medical and disability data, see what it says, decide what their health priorities should be, and design incentives accordingly.   


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