Innovations to Preserve Quality and Contain Cost

December 15, 2006
Sean Nicholson, PhD

Volume 12, Issue 12 SP

Companies often state in their annual reports that"our employees are our most important asset."The increased reliance on skilled workers whounderstand technology and can develop profitable innovationswould seem to support these claims. If employeescan be viewed as assets, then a company's healthbenefits and health promotion programs can be viewedas investments to maintain and enhance the productivityof those assets, much like maintenance costs for amachine.

To make smart health investments, a company needsto know the financial impact of health programs andhealth benefits, as well as their costs. Currently, however,companies have much better information on the latterthan the former. How might investments inemployees' health affect a company financially?Because healthy workers use relatively few medicalservices, it stands to reason that companies shouldinvest in any program (eg, disease management) or subsidizeany medical service (eg, eliminate copayments forroutine physicals and vaccinations) that improves thehealth of its employees and reduces its future medicalcosts (in present dollars) by more than the cost of theprogram. Although this sounds straightforward, thechallenge is that many programs and services are onlycost effective for employees with particular characteristics(ie, those with a severe illness), but not for the averageemployee.

If it is true that healthier employees are less likely tobe absent and be more productive when they are presentfor work, then how costly are health-relatedabsences and on-the-job productivity losses due to poorhealth? Almost half of the senior financial executivessurveyed by the Integrated Benefits Institute (IBI) in2005 believe that absenteeism and "presenteeism"(reduced on-the-job productivity due to poor health)have an adverse financial impact on their company, butthese impressions are usually based on intuition ratherthan objective data.1 This means that few companies arelikely to include a quantitative financial estimate of thevalue of reduced absences and improved on-the-job productivitywhen designing health benefits.

The American Journal of Managed


Academic researchers and practitioners can helpcompanies invest wisely in the health of their workers.There are relatively few studies in the literature thatpersuasively measure the causal effect of health benefitson employee health. There are even fewer studies thatquantify the impact of benefit design on a company'sprofit. This issue of contains 6 articles that aspire to help employersidentify a health benefits package that will cultivatetheir employee assets in a cost-effective manner.

Many employers in the United States are attemptingto improve the quality of healthcare by enrollingemployees in disease management programs andembracing pay-for-performance reimbursement systems.At the same time, many of these same employersare attempting to reduce healthcare expenditures byincreasing employee copayments, thereby encouragingthe use of high-value services and discouraging the useof low-value services. Fendrick and Chernew2 point outthat these 2 objectives of benefit design—quality promotionand cost control—often work at cross purposes withone another. A cornerstone of disease management programsis adherence to prescription drugs, whereas higherdrug copayments discourage employees from takingtheir medication. If employees can distinguish betweenhigh-and low-value healthcare services, they wouldalways take medication that markedly improves theirhealth. Unfortunately, however, many employees arenot sufficiently informed to make this determination, orchoose not to adhere because they do not face the fullfinancial consequences of failing to adhere. Fendrickand Chernew describe a way to customize health benefitsso that the cost that an employee faces for a particularservice depends on his or her expected value fromthat service.2

Gibson and her colleagues3 demonstrate that changinghealth benefits sometimes has unintended consequences.They show that higher copayments for statindrugs are associated with lower adherence rates amongemployees taking statins. The employees who had beenusing statins for an extended period of time but ceasedwhen copayments increased subsequently had moreemergency room visits and hospitalizations than similaremployees who continued adhering to drug therapy.3Interestingly, there was no difference in total (prescriptiondrug plus medical)health costs between thosewho did and did not adhereto statin therapy aftercopayments were increased;the increase in medical costswas offset by a reduction inprescription drug costs.

One conclusion from theGibson et al study is thatraising copayments forstatin drugs will have little impact on a company's bottomline. It is possible, however, that the employees whostopped taking their statin drugs will eventually be inworse health, will incur more absences, and will be lessproductive while at work. If so, a more comprehensive(and more difficult) analysis may have concluded thatthere is a business case for lowering statin copayments.Nicholson4 develops a financial model that determinesthe financial consequences of changing diabetes mellitus(DM) drug copayments. The model, which linkstogether a number of different published studies, allowscopayments to affect employees' adherence, pharmaceuticalexpenditures, medical expenditures, absences,and on-the-job productivity. Nicholson estimates thatreducing copayments for DM drugs would reduce totalhealth costs by 3%, with larger savings if one incorporatesthe value of reduced absences and improved on-the-job productivity.4

Living Healthy



The final 3 papers evaluate the health and/or financialimpact of 3 different health programs. Bunn and hiscolleagues5 describe a concerted effort to improve themanagement of short-term disability events at InternationalTruck and Engine Corporation (ITE). By educatingand working more closely with physicians in thecommunity, ITE was able to reduce the frequency ofinjuries, the average work days lost per injury, and thetotal indemnity payment per injury.5 Thomas andMiceli6 examine Lockheed Martin's program to teachemployees with DM or hypertension how to managetheir health condition. Relative to the treatment group,employees who were randomized into the educationalintervention group subsequently experienced animprovement on 1 of 4 health measures (diastolic bloodpressure).6 Because there was no difference between the2 groups in absence days, it is not clear whether there isa business case for this particular program. Finally,Denelsbeck7 describes a health management initiativeat Pfizer whose objectiveis to educate and empoweremployees to manage theirhealth. An impressive 83%of employees completed ahealth risk assessment questionnairein the first year ofthe program, thanks in partto generous financial incentives.7 The goal in the secondyear of the 3-yearprogram is to change employees' health behavior.Unfortunately, only about one fourth of employees identifiedas being eligible for the and programs actually signed up. This indicatesthat employers are not the only ones who are skepticalabout whether health promotion programs will work,and/or employees do not place a large value on theexpected health benefits of these programs.

It is clear from this collection of articles that there isno consensus regarding what constitutes "optimal" benefitdesign. Employers continue to tinker with benefitsand institute new health promotion programs in aneffort to control costs while simultaneously improving,or at least maintaining, employee productivity. Althoughthe science of measuring the business impact of benefitdesign is lagging behind employers' desires to makechanges, the science is catching up.

From the Department of Policy Analysis and Management, Cornell University, Ithaca,NY, and the National Bureau of Economic Research, Cambridge, Mass.Funding provided by Pfizer Inc.

Address correspondence to: Sean Nicholson, PhD, Department of Policy Analysis andManagement, Cornell University, Ithaca, NY 14853. E-mail:

1. Integrated Benefits Institute. Beyond cost containment to health and productivity:a shift in employers' healthcare focus. Available at: Accessed November 28, 2006.

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2. Fendrick AM, Chernew ME. Value based insurance design: aligning incentives tobridge the divide between quality improvement and cost containment. 2006;12:SP5-SP10.

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3. Gibson TB, Mark TL, Axelsen D, Baser O, Rublee DA, McGuigan KA. The effectsof statin copayments on adherence and medical care utilization and expenditures.2006;12:SP11-SP19.

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4. Nicholson S. The effect of cost sharing on employees with diabetes. 2006;12:SP20-SP26.

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5. Bunn III WB, Taylor DD, Baver RS, et al. Impact of a musculoskeletal disabilitymanagement program on medical costs and productivity in a large manufacturingcompany. . 2006;12:SP27-SP32.

Know Your Health

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6. Thomas P, Miceli B. Evaluation of the program for type 2 diabetesmellitus and hypertension in a large employer group. 2006;12:SP33-SP39.

Healthy Heart

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7. Denelsbeck S. Engaging employees in health and wellness: Pfizer's program. 2006;12:SP40-SP43.