Why Wellness Matters: The Real Cost to Employers of Unhealthy Employee Behaviors
It is no secret that health care costs have ranked among the top concerns of employers for much of the last decade. There is good reason for this concern, as health care costs have outpaced inflation for years, and employers often bear the brunt of these costs for their employees and dependents. Employers looking for ways to stem the tide of runaway health plan expenses should investigate wellness programs designed to impact the source of the costs – unhealthy behaviors.
U.S.A. - Unhealthy States of America
Generally speaking, rational purchasers expect to see improved results when they increase their spending. Yet, despite health care costs consuming an ever-increasing share of company budget dollars, employers are not seeing a return on their investment in the form of improved employee health. In fact, the opposite has been the case. The U.S. population has experienced a significant increase in the incidence of serious health conditions and their accompanying high medical costs, as evidenced by the following trends.
- One in five Americans smokes, and smoking is the number one preventable cause of death in the United States1. According to the Centers for Disease Control and Prevention (CDC), health care costs for conditions related to smoking total $96 billion per year.
- The percentage of obese Americans has tripled since 19602. As shown in the chart below, the prevalence of obesity has a significant impact on medical spending in the United States, and is expected to continue its dramatic increase in the future1.
- From 1995 to 2010, the incidence of diabetes increased by 50% or more in 42 states, and by 100% or more in 18 states3. Diabetes accounted for $116 billion in medical costs in 20074, up from $92 billion in 2002 and $44 billion in 19975.
- Nearly 30% of young adults age 18 to 25 have a diagnosable mental health disorder, and 5% of U.S. adults have a mental health-related disability that seriously impairs their daily functioning. Behavioral and mental health issues comprise approximately 6% of total health care costs6.
- Baby boomers, while living longer than the previous generation, are actually sicker. A study by the American Medical Association reports that baby boomers have more illnesses, experience more disabilities, and need more medical care, prescriptions, and durable medical equipment than their parents did. Forty percent are obese and 52% get no regular exercise, compared to 29% and 17%, respectively, of their parents’ generation.7
Implications for Employers
Why should employers care about, and invest company resources in, the health and wellness of their employees? Beyond the obvious concern of out of control health care costs, poor employee health can also have a significant impact in other areas, such as absenteeism, productivity and “presenteeism” (being physically present at work, but functioning at less than full capacity due to illness, stress or other personal issues). Some studies suggest that these indirect costs actually surpass the direct costs of medical care.
The Integrated Benefits Institute estimates that the true cost of poor health to the U.S. economy is $576 billion, as detailed in the chart below8.
Another study estimates that for every $1 spent on medical and pharmacy costs, an additional $2.30 is spent on health-related productivity costs9. With employers paying a significant share of these dollars, poor employee health has a considerable impact on the bottom line.
As noted previously, the incidence of chronic illness in the U.S. is on the rise. Consider the following additional statistics on the impact this illness has on employers:
- Individuals classified as obese (i.e., BMI of 30 or higher) have a higher risk of many medical conditions (e.g., heart disease, diabetes, chronic pain). In addition to medical expenses, obesity-related absenteeism costs employers over $6 billion per year2.
- Diabetes accounted for $58 billion in indirect costs in 2007 (i.e., lost work days, restricted activity days, mortality and disabilities)4. At least 90% of diabetes cases are type 2, which can often be prevented through behavior change3.
- Medical claim costs are at least double for individuals with five or more risk factors (e.g., obesity, smoking, high blood pressure, high cholesterol, etc.) compared to those with two or fewer risk factors10.
- The cost of health care has been found to be 46% higher for employees with high levels of stress11.
- $260 billion is lost annually in productivity due to sick days, with 69 million workers reporting missing work because of illness12.
- The total cost of unplanned employee absences was reported to be 9.2% of payroll costs, taking into account both the direct costs (disability, salary continuation, etc.) and indirect costs, such as replacement labor expenses and lost productivity13.
As noted above, baby boomers have significantly greater incidence of medical issues and associated costs than those of the previous generation, and they can potentially add to employer costs as they remain longer in the workforce. Average per employee medical claim costs for employees age 60-64 are more than double the costs of employees age 35-3910.
The cost of these unhealthy behaviors and related chronic medical conditions will be felt by the employer’s health plan, either through direct claim payments under a self-funded plan, or through premium increases under an insured plan. Dependents’ health issues can also have a significant impact on an employer’s costs, in terms of direct health care expenses (if covered on the health plan), absenteeism for the employee to care for the dependent, and lost productivity. Even employees not covered on the company’s medical plan can still cost their employers in terms of absenteeism and lost productivity caused by their own or their dependents’ health issues.
What can employers do?
These alarming statistics should be a wake-up call for employers. Unhealthy employee behaviors impact employers in many ways, including increased medical costs, absenteeism and lost productivity. On the positive side, employers have the ability to help change the course of these rising costs. If employers can identify the high risk areas in their employee population, they can make proactive changes to their health plan design, as well as provide tools and solutions to help employees lower those risks and their associated costs.
Behavior is a significant driver of health care costs. In fact, according to the Centers for Disease Control & Prevention (CDC) and the Institute for the Future (IFTF), behavior is the major determinant of health, having as much effect as genetics, environment and access to care combined.
Determinants of Health
The CDC estimates that more than 75% of U.S. health care costs are due to chronic conditions, which are largely preventable by reducing behavior-based risk factors. Behavior can be modified, and employers can help employees by providing the appropriate tools, such as health promotion programs with incentives to change unhealthy behaviors and adopt new, healthier behaviors. Employers can also adopt plan designs that capitalize on this connection between behavior, health, and the cost of health care and help employees take steps to ensure they lower health risks and costs.
Health plan design
Plan designs can help to change behaviors and alleviate cost increases in a number of ways. Value-based plans provide incentives to encourage the appropriate use of high-value services that ultimately lead to better health and reduced catastrophic claim costs. A common example is lowering – or eliminating – the prescription cost-sharing for insulin for diabetics, to encourage compliance with prescription treatment. This is a high-value service since it greatly reduces the likelihood of a catastrophic claim resulting from failure to properly manage the condition. Another plan design option is the use of tiered provider networks, where the plan pays higher benefit levels to participants who use providers with the best performance on cost and quality measures. Consumerism also aims to change behavior and can help reduce costs by giving employees more responsibility for managing health care dollars and making wise consumer choices in how they spend them. Examples include high deductible plans with health savings accounts (HSAs). Employees who make healthy behavior changes can lower their own health expenses, leaving unused dollars in their HSAs to fund the cost of their future health care.
Many employers offer comprehensive wellness and disease management programs in an attempt to improve the health status of employees and their covered dependents, thereby lowering health claim costs. Sixty-three percent of employers offering health benefits also offer at least one type of wellness program14.
Disease management programs, which have been offered by most health insurance plans for years, are geared toward individuals with chronic health conditions. The goal of these programs is to educate and reach out to affected members to keep them in compliance with treatment and avoid the potential high costs related to non-compliance. Conditions commonly covered by disease management programs include diabetes, hypertension, asthma, high cholesterol, depression and lower back pain.
Wellness programs, in contrast, are designed to reduce costs by improving the health of all members. While there may be some overlap between wellness and disease management programs, the wellness side is focused more on prevention and lowering health risks, as opposed to simply managing an existing condition. Wellness programs have typically included rewards and incentives, such as cash and gift cards, for participation in certain events. These programs are now evolving to include outcomes-based incentives rather than just participation-based, with the goal of impacting behavior and health care costs. Employers are currently allowed to offer outcomes-based incentives of up to 20% of the full cost of coverage in their health plan (based on both the employer and the employee shares of the premium). The health care legislation passed in 2010 (Patient Protection and Affordable Care Act) increases this maximum incentive from 20% to 30% beginning in 2014. This legislative change, along with the increasing focus on the effect of behavior on health, have provided the momentum for employers to truly impact the health of their employees, as well as to mitigate future increases in their health care expenses.
Components of a Successful Wellness Program
Employers have the ability to drive behavior change through the use of wellness programs designed to change the unhealthy behaviors that can lead to high medical costs, increased disability claims, and loss of productivity, as outlined above. A recent Mercer study found that employers with a greater commitment to employee health and wellness experienced average annual medical premium cost increases of two percentage points lower than those of other employers. Listed below are some components that should be included to help ensure the success of an employee wellness program.
Written strategic plan
A company’s wellness program should be in writing, with specific and measurable goals that are tied to the overall corporate strategic plan. The wellness program should also have its own distinct mission and vision statement.
Culture of health
The most successful programs involve a culture of health that is visible throughout the organization, in ways such as:
- Senior leadership support and buy-in of the program, as well as active participation in the program
- Campaigns/promotions/competitions, e.g., step counting, fruit/vegetable counting, etc.
- Employee wellness committees
- Healthy food in cafeterias and vending machines
- Opportunities to be active, e.g., exercise breaks, on-site fitness centers, walking paths, etc.
- Social networking to increase employee engagement
Health Risk Assessment (HRA) / Health Risk Questionnaire (HRQ)
The health risk assessment is a detailed questionnaire completed by employees to determine their health risk based on health habits, e.g., nutrition, exercise, smoking, drinking, drug use, stress, depression, sleep, safety, etc. The questionnaire becomes part of the record used to establish baseline risk status and measure ongoing improvements.
Along with the health risk assessment, biometric screening results form part of the basis for assessing current risk status and become a comparison point for measuring future progress. The screenings typically include height, weight, BMI, blood pressure, cholesterol, triglycerides, glucose, and nicotine. They are usually offered on-site, with an option for employees to visit their personal physician for screenings. Employers typically can choose between a full blood draw screening or a finger prick testing method, with the full blood draw generally being more costly, but potentially offering a wider variety of available tests. With either method, detailed results reports are provided to participants and can also be shared with personal physicians.
Engaging at-risk participants is key to improving their health risk status. Health coaching provides support for employees who are identified as being at risk for certain health issues, as determined by their HRQ and biometric screening results. Coaching can be provided via telephone, on-line, e-mail or on-site. Topics typically included are weight management, nutrition, fitness, smoking cessation, stress, depression, and healthy pregnancy.
Incentives for improved outcomes
Employers and insurance companies have long used incentives to reward participation in various wellness-related activities (e.g., completing a HRQ, participating in an on-site screening event, joining a gym, logging nutrition and exercise data, etc.). Fifty percent of wellness programs include some type of financial incentive15. Over recent years, incentives have been evolving both in the type of reward used, and in the activity required to earn the incentive.
Rather than giving incentives for one-time participation in wellness events, more employers are using incentives that are tied to specific and measurable improvements in results, such as biometric screening measures and health risk status levels (e.g., meeting a threshold level for a screening or showing a certain improvement over a prior measurement). In order to achieve real results, employers are finding that the incentives need to motivate employees to change their unhealthy behaviors. According a 2011 National Business Group on Health (NBGH) survey, 6% of employers had outcomes-based incentives in 2010, but 33% reported planning to adopt this approach in 201215.
Employers are also changing the types of incentives offered. Historically, incentives included one-time rewards such as cash, gift cards, and paid time off. More recently, incentives are moving toward ongoing rewards that can help to show the link between behavior and the cost of health care. Examples of this type of incentive include reductions in the employee share of medical premiums, reduced deductibles and coinsurance, and employer contributions to health savings accounts or health reimbursement arrangements. (NOTE: Comparability rules apply to employer contributions to health savings accounts.) These incentives have the advantage of being tax-free to employees, and in some cases, tax-deductible to employers. In addition, the medical premium reduction can be structured in such a way that the wellness program is cost-neutral (i.e., the additional medical premiums paid by non-participants can cover the cost of the wellness program for participants).
Average wellness incentive amounts are also on the rise. The 2011 NBGH survey reported the average wellness incentive value was $460 in 2011, up from $260 in 2009, a 77% increase in just two years15. As noted above, PPACA increases the maximum results-based incentive from 20% to 30% of the total health plan cost beginning in 2014.
Programs that include a website with a robust suite of web tools can help participants to stay engaged and interested. Typical offerings include web tools to assist with planning and tracking information and progress toward goals (e.g., nutrition and exercise trackers, shopping lists, etc.). Some web programs also include on-line coaching and educational modules for employees to complete, newsletters that can be accessed on-line or e-mailed to participants, symptom checkers, reminders for recommended preventive screenings, and opportunities to enroll in competitions with fellow employees.
On-site educational programs can be included to improve communication, employee engagement, accessibility, and compliance with recommended screenings and immunizations. Some programs that can be offered on-site include biometric screenings, immunizations, health coaching and educational seminars.
Some larger companies (1,000+ employees/dependents as potential users) take things a step further and offer their wellness program in conjunction with an on-site employee health/wellness clinic. Services can range from oversight of the wellness program, to a full-blown health clinic with preventive care, acute care, chronic condition management, pharmacy, laboratory, occupational health, and even dental care. On-site clinics require a significant up-front investment, and therefore, it may take several years for employers to see a return on their investment16.
Stress cost-effective preventive care
Successful wellness programs stress the importance of proper preventive care and adherence to treatment plans to improve employee health and reduce the incidence of high-cost chronic illnesses. Screening rates for breast, cervical and colorectal cancers are currently below the national targets, and preventive services have been shown to have short-term and long-term benefits related to health, productivity and the nationwide cost of health care12. Tools can also be provided for employees to help locate cost-effective providers of preventive care to help offset the costs of potentially increased utilization of preventive office visits.
As previously stated, health issues of dependents, particularly spouses, can have a significant impact on an employer’s health plan costs. They can also result in increased absenteeism and lost productivity for employees who are dealing with the illness of a family member. For these reasons, employers should consider covering spouses on the company wellness program.
Including employees who are not covered by a company medical plan can also have benefits, as improving overall employee health can help reduce the incidence of employee absence, as well as disability and workers’ compensation claims, for all employees. Also, as these employees could opt to join their employer health plan in the future, it is in employers’ best interests to engage them in their wellness efforts sooner rather than later.
The economic difficulties faced by many in recent years have taken their toll on the health of Americans.
- Eight in ten Americans in a recent study reported money and the economy as significant sources of stress17.
- The 2008 Associated Press and AOL Health Poll reported that employees suffering from financial stress are more prone to a variety of health risks, as shown in the chart below.
In addition to increased medical expenses, these employees also cost employers in terms of missed work time due to medical issues, and lost productivity due to worrying about financial issues and spending work time dealing with personal financial matters. Financial distress has been noted as one of the strongest predictors of workplace absence18.
To help combat this added stress, employers may want to incorporate a financial wellness program alongside their health wellness program. Financial wellness programs can include education on productive financial habits, financial literacy tools, budgeting tools, impulse savings tools, and illustrations of how small spending changes can translate into significant wealth accumulation over the long-term.
Employees, who may already be struggling trying to save for retirement, can be educated on the connection between their health and wealth issues. Improving their health, and lowering health care costs, will leave more money available for retirement savings. If their plan includes a health savings account, lowering their health spending now by improving their health status can leave unused dollars in their HSA to use for health care expenses in retirement. In addition, employers with limited overall benefits budgets will have the ability to allocate more toward the company’s retirement plan, to the extent that they are reducing health risks and thereby lowering their health plan expense.
Targeted communication includes personalized messages based on an individual’s specific health risks, diagnosis with a specific medical condition, and personal characteristics (i.e., age, gender, etc.). These can include automated reminders for recommended treatments, preventive screenings, prescription refills, recommendations for coaching, and referrals to appropriate on-line resources. Targeted messages are more effective in motivating employees and covered dependents to take the desired action. These targeted messages can be sent by traditional methods, but more recently, electronic forms of transmission (e.g., e-mail, text messages, automated phone messages, and social media) are becoming commonplace.
Integration with other programs
Employers should integrate their wellness program with any other related services offered to employees, such as disease management and employee assistance programs. This will ensure that employees receive a seamless experience and employers receive maximum value for their investment in these programs.
Results measurement (ROI)
A key component of any wellness program is measuring results. Yet most companies offering wellness programs do not have a formal process in place for measuring ROI – the savings achieved by the program compared to the cost of implementing and managing it. Only 17% of companies in a recent survey strongly agreed that their program effectively tracks ROI19. Another survey found that 88% of companies surveyed did not measure or had insufficient data to measure ROI20. While few would argue against the importance of measuring results, the difficulty lies in determining what to measure, how to measure it, and whether the results can be definitively attributed to the wellness program. Complexities arise as health plan costs as a whole may continue to increase even though health risks are being reduced, and employers struggle with how to measure cost avoidance (if claims are never realized due to early detection or change in behaviors brought about by the program).
A 2010 study reported in Health Affairs magazine illustrates some of these difficulties. This study, which included mostly large employers with 1,000 or more employees, found an ROI of $6.00 for each wellness program dollar spent, including a reduction in health plan costs of $3.27 and $2.73 in the cost of days absent from work21. However, the study questioned whether these effects could be generalized to smaller employee populations. It also questioned the effect of selection bias, or the tendency for the healthiest employees to enroll in the program, making the comparison of participants to non-participants an inaccurate measurement as the participants’ better results are not necessarily due to the wellness program21. Additionally, this study suggested the possibility that wellness program costs are more likely to be higher at the front-end, while reductions in health care costs will be realized more gradually, indicating that the ROI over time may be understated (i.e., the ROI is likely to be higher in later years of the program).
While it may be difficult for employers to determine with certainty that any positive results obtained are the direct result of the wellness program, it is important for companies to establish a baseline from which to measure future improvements and determine future changes to the program. Employers should customize their wellness program to focus on areas that are prevalent health risks for their specific employee population and then measure changes in those risk factors. Most experts agree that a multi-year measurement period is needed to see results and a return on investment. Some key areas where companies should focus their measurement efforts include:
- Participation rates
- Biometric screenings
- Health coaching
- Web tools
- Changes in health risk status
- Changes in per employee claim costs
- Participants v. non-participants
- Lifestyle-related claims (i.e., claims that can be prevented by changing behavior)
- Increases in recommended preventive care
- Decreases in unnecessary care (e.g., emergency room visits)
- Compliance with treatment (coordinate with disease management program)
- Decreased absenteeism
- Disability claim statistics
- Employee satisfaction rates
A results-based wellness program can help an employer’s efforts to improve employee health and mitigate the risk of future high cost claims. However, such programs, if not properly implemented and managed, can run afoul of various legislation, namely HIPAA, GINA, ADA, COBRA and ERISA. Given the many legal ramifications of results-based wellness incentives, some of which are detailed below, employers should seek legal counsel to ensure their program is fully compliant.
Health Insurance Portability and Accountability Act (HIPAA)
In addition to regulations regarding the privacy and security of protected health information under health plans, HIPAA imposes five requirements specific to wellness programs with results-based incentives22.
- The program must be reasonably designed to promote health and prevent disease.
- The program must give individuals the opportunity to qualify for the incentive at least once per year.
- The program must be available to all similarly situated individuals and must allow a reasonable alternative standard for individuals with a medical condition that would make it unreasonably difficult or medically inadvisable for them to meet the proposed wellness standard.
- The program must describe the availability of the reasonable alternative standard in all program description materials.
- The program must limit the total results-based incentive to 20% of the cost of employee-only coverage under the health plan (increasing to 30% in 2014 under PPACA). The limit applies to the cost of employee + spouse/dependent if spouses and dependents may participate in the program.
Genetic Information Nondiscrimination Act (GINA)
GINA limits the medical information that can be requested under a wellness program. Specifically, participants can’t be required to provide genetic information, including family medical history, to qualify for an incentive. This would include answering questions about family medical history on a HRQ in order to qualify for an incentive23. If such questions are included, participants must be given the option to leave those questions unanswered and still receive the program incentive for completing the HRQ.
Americans with Disabilities Act (ADA)
The ADA imposes additional nondiscrimination requirements on wellness programs. Reasonable alternatives must be provided for individuals who can’t participate in some part of a wellness program due to a known disability. Any medical examination component must be voluntary, and would not be considered voluntary if there is a penalty for not participating. Some wellness programs could be considered medical examinations under the ADA23. Additionally, the ADA prohibits penalizing or withholding a reward based on a disability. For example, severe obesity is considered a disability under the ADA, which would limit the ability of a wellness program to offer weight loss incentives for individuals with this condition.
Consolidated Omnibus Budget Reconciliation Act (COBRA)
A results-based wellness program is considered a health plan and, as such, is subject to COBRA’s continuation of benefits provisions.
Employee Retirement Income Security Act (ERISA)
A results-based wellness program is a health plan under ERISA, and will require a plan document and summary plan description (SPD), in addition to being subject to all other ERISA reporting and disclosure requirements.
This is not meant to be an exhaustive description of the legal and compliance issues associated with wellness programs. For example, some enrollment practices, such as conditioning enrollment in the medical plan on participation in the wellness program, have been questioned by the EEOC15. As noted above, employers should seek legal counsel to ensure their program is compliant with all relevant legislation. In addition, all communication materials and policies related to the program should be reviewed for compliance.
A thorough request for proposal (RFP) process is essential to finding quality vendors to partner with in managing a comprehensive wellness program. Important considerations in evaluating potential vendors include their fees, as well as their abilities in the following areas:
- Communication support
- Compliance support (plan design, plan documents, etc.)
- Reporting capabilities
- Performance guarantees tied to health improvement
- Coordination with other vendors (e.g., health plan insurance company or third party administrator, disease management vendor, etc.)
- ROI measurement
- A health plan consultant with wellness program experience can assist employers with the process of evaluating and selecting a vendor, designing the program, and managing the chosen vendors.
Wellness matters to employees, and it should be equally concerning to employers. With health care consuming a considerable portion of many employers’ budgets, it only makes sense for employers to protect their investment by helping employees to optimize their health outcomes.
Employers have much to gain from investing in the health of employees and their dependents. And they have much to lose if they don’t, in terms of:
- Health plan cost increases
- Increased absenteeism and disability rates
- Lost productivity
Employee health should be viewed as an investment with a long-term payoff, rather than as just another ongoing expense. Taking proactive steps now to prevent or reduce the incidence of chronic illness, and giving employees tools to assist them with planning for their future health and well-being, can produce a positive return in the form of a healthier, more productive workforce, as well as the potential to reduce future catastrophic claim costs.
1USA Today, “Rising obesity will cost U.S. health care $344 billion a year,” Nanci Hellmich, November 17, 2009
2Reuters, “As America’s waistline expands, costs soar,” Sharon Begley, May 7, 2012
3Centers for Disease Control and Prevention Press Release, “Diagnosed diabetes grows at a dramatic rate throughout the United States,” November 15, 2012
4Centers for Disease Control and Prevention, “2011 National Diabetes Fact Sheet”
5U.S. Department of Health & Human Services, “Nationwide cost of diabetes up $3.4 billion”
6Employee Benefit Adviser, “Behavioral health costs account for 6% of health plan spending,” Lisa Gillespie, June 6, 2012
7Employee Benefit News, “Baby boomers living longer – but sicker – than previous generation,” February 5, 2013
8Integrated Benefits Institute, “Poor Health Costs U.S. Economy $576 Billion According to the Integrated Benefits Institute,” September 12, 2012
9Journal of Occupational and Environmental Medicine, “Most Employers Underestimate Full Costs of Employee Health on Productivity,” April 2009
10World at Work Journal, “The Aging Workforce: Challenge or Opportunity?”, 3rd quarter 2006
11American Psychological Association Practice Organization, “Psychologically Healthy Workplace Program Fact Sheet: By the Numbers”, 2010
12Change Healthcare, “Affording the Affordable Care Act: Engaging Employees in Finding Lower-Cost Preventive Care,” March 2012 Healthcare Transparency Index
13Mercer, “The Total Financial Impact of Employee Absences,” October 2008
142012 Kaiser/HRET Survey
15Benefits Magazine, “Wellness Incentive Strategies That Work,” Kristie Zoeller Howard, October 2012
16Benefits Magazine, “The Doctor Is in – at the Workplace,” December 2011
17Research Works - Partnership for Workplace Mental Health, “Employee Personal Financial Distress and How Employers Can Help”, February 2009
18“It’s Time to Create a Financially Literate Workforce to Improve the Bottom Line”, Aimee D. Prawitz and E. Thomas Garman, Personal Finance Employee Education Foundation
19“Wellness in the Workplace 2012: An Optum Research Update”
20PricewaterhouseCoopers, “Health and Well-Being Touchstone Survey Results,” May 2012
21Health Affairs, “Workplace Wellness Programs Can Generate Savings,” Katherine Baicker, David Cutler, Zirui Song, February 2010
22U.S. Department of Labor, “FAQs About the HIPAA Nondiscrimination Requirements,” April 6, 2011: http://www.dol.gov/ebsa/faq_hipaa_ND.html
23Rand Health, “A Review of the U.S. Workplace Wellness Market,” Soeren Mattke, Christopher Schnyer, Kristin R. Van Busum, July 2012
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