Reducing Employee Health Care Costs: Strategies for Employers

The Escalating Health Care Cost Crisis

A full-scale health care benefits crisis appeared to loom as employers were reported to spend $300 billion annually on the health insurance of employees, their dependents, and retirees (Weatherly 2004). Health care costs for large employers were estimated to have risen by 12.6% in 2004, compared to 14.7% in 2003, 15.2% in 2002, 10.2% in 2001, and 9.4% in 2000. The hoped-for slowing of average health care cost increases since 1996 was not expected to continue. Radically reducing benefit plan coverage to control rising costs had not occurred, either. Benefit plans tended to remain stable, as employers did not quickly adopt the innovative health care benefit strategies recommended by benefit plan providers. Instead, human resources (HR) professionals opted for other measures to offset rising benefit costs. These included cost-shifting of premium increases to employees, higher deductibles, mail-order and generic prescription programs, and increased patient cost-sharing. These costs and premiums were expected to adversely affect the U.S. economy, and therefore these preferred strategies could not continue indefinitely without a proportionate and adverse impact on total employee compensation (Weatherly).

The mass media, major consulting groups, and health care experts agreed that health care costs were a critical concern to the vast majority of chief operating officers, chief human resource officers, and other business leaders (Weatherly 2004). Against an estimated 14% annual increase, employers said they could accommodate only an average annual increase of 9%. This gap meant that employer costs would increase by approximately 54% over the next five years. During that period, employee contributions could triple until all parties resorted to some proactive approach to contain the rise. HR leaders agreed that better value and lower health costs — achievable at between 83% and 96% — were possible if they worked together with employees toward that goal (Weatherly).

Per capita health care costs increased by 156% from 1980 to 1990, then slowed to a 71% increase from 1990 to 2000 (Weatherly 2004). Employers managed to contain costs in the 1980s largely because of the emergence of health maintenance organizations (HMOs), which provided economic relief and contributed to the slowing of rising health costs during that period. At the start of the new century, employers needed to contend with a weakened economy and significant health care costs once again. The difference this time was that intense competition and overcapacity among industries made it difficult for businesses to pass cost increases along to customers and clients. As a result, the cost of insurance premiums shifted increasingly to employees.

Moreover, managed care organizations lost power and influence in the market as HMOs and preferred provider organizations (PPOs) had to relax many restrictions to allow greater flexibility and choice to consumers. Current strategies in health care benefits management include association-sponsored plans (ASPs), retiree health insurance, and consumer-driven health plans (CDHPs). ASPs were designed for smaller employers who could purchase insurance through a business, trade, or professional association. Retiree health insurance targeted those aged 50 to 64 who were eligible for retirement but could not afford to retire due to a lack of affordable health care coverage. CDHPs considered both the cost and appropriateness of care. They were high-deductible plans consisting of a personal account and a high-deductible insurance component. The personal account contained employer funds that employees could use to reimburse health care expenses below the deductible threshold. These plans, with their health care reimbursement accounts and catastrophic insurance coverage, proved popular among employers, and their number was expected to double in response to continuing increases in health care benefit costs (Weatherly).

Early Cost-Containment Strategies and Wellness Programs

The 1989 Employee Benefits Survey of medium and large business organizations revealed that 44% of full-time employees with medical care benefits participated in plans requiring preadmission certification (Hyland 1992). The survey also showed that 23% of these employees were enrolled in plans with utilization review, which monitored the course of medical care. These figures increased in 1990 to 53% for employees in a medical plan and 64% for their counterparts in state and local governments requiring pre-admission certification. Employers themselves encouraged employees to take preventive measures that would bring medical costs down. Such measures included reducing smoking, limiting alcohol and substance abuse, and managing stress and poor diets.

The Department of Health and Human Services reported that more than $65 billion was spent on smoking-related medical care costs each year, and it attributed higher rates of absenteeism and lower productivity to smoking as well. Extreme stress and poor nutrition were considered leading causes of cardiovascular conditions and heart attacks. Alcohol and substance abuse accounted for $144 billion in expenditures on treatment, lost productivity, and other costs. Expenditures on mental illness amounted to $129 billion annually. Wellness programs and employee assistance programs addressed such health problems directly. Offered to full-time employees in medium and large organizations, these programs helped employees care for their health by addressing smoking cessation, accident prevention, weight control, cholesterol screening, stress management, and hypertension screening.

If successful, wellness programs improved employees' overall health, lowered the incidence and severity of medical conditions, and reduced the frequency and cost of medical claims. However, the savings realized from these programs typically took years to materialize and to produce measurable improvements in employee health. From 1875 to 1986, health benefit premium increases averaged only 4.5% in companies with wellness programs, compared to 10% in companies without them. The figure declined further to 2.8% for companies with such programs, versus 9.9% for those without. Companies with wellness programs attributed these savings to reduced absenteeism and increased productivity and morale. A survey conducted by Coopers & Lybrand found that a wellness program cost approximately $50 per employee per year and that most employees expressed satisfaction with these programs.

Employee assistance programs (EAPs), on the other hand, addressed mental health, alcohol, drug, family, and financial problems. The common practice was for the company to contract an outside provider — typically a hospital or an independent service enterprise. EAPs could, however, increase claims for mental health and substance abuse treatment, as one of their primary functions was to refer employees to mental health care providers. Nonetheless, the average cost increase for mental health care attributable to EAPs was lower than critics suggested. Mental health costs could rise initially due to early intervention, but overall medical costs would generally decrease over time, according to proponents (Hyland).

Conclusion

The array of strategies examined in this paper illustrates that no single approach can fully resolve the crisis of rising health care costs. Employers must weigh short-term savings against long-term impacts on employee health, productivity, and morale. From consumer-driven health plans and wellness programs to back-injury prevention, commuter benefits, class-based pensions, and mental health carve-outs, organizations have pursued a wide variety of paths toward cost containment. What the evidence consistently suggests, however, is that strategies that reduce or restrict access to care often generate downstream costs — in absenteeism, turnover, and diminished productivity — that may outweigh initial savings. Sustainable cost reduction requires genuine collaboration between employers and employees, guided by data and a long-term commitment to workforce health.