The 'Simple' Solution to High Employee Health Costs

A first-of-its-kind report finds that the most effective way to reduce public workers' health expenses isn't popular cost-cutting moves like wellness programs, which rarely produce significant savings.
by | September 18, 2014

Last month, Maryland officials approved new health insurance contracts that will impose a carrot and stick mentality on the state’s more than 250,000 employees, retirees and dependents. Those who see a primary care physician, get a health assessment and follow up on recommendations made by the doctor will have their preventative care (including lab work, x-rays and some generic drugs) fully covered with no co-pay; while those who choose not to see a doctor or follow their advice will see their premiums rise by up to $375 per year by 2017. The state says it stands to save $4 billion in health-care costs over the next ten years.

Maryland officials argued the state spends too much money covering health-care costs for those who don’t seek preventative care or comply with doctors’ advice -- both of which lead to persistent problems. Across the country, every state is grappling with this same scenario. But there’s only so much states can do to control costs through policy changes like Maryland’s new incentives program, according to a new report.

In August, The Pew Charitable Trusts and the John D. and Catherine T. MacArthur Foundation released a first-of-its-kind report analyzing the costs of state employee health plans. The major finding? In 2013, for the 2.7 million households insured under 49 state-sponsored plans (Pennsylvania doesn’t publicize its data), spending totaled nearly $31 billion -- $25 billion of which was covered by the state, or an average monthly premium of $805 per employee.

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On average, Southern states had lower premiums; the cheapest were in Arkansas, Mississippi, New Mexico, South Carolina and South Dakota.  While the Northeast had some of the highest premiums; the most expensive were in Alaska, New Hampshire, New Jersey, Vermont and Wisconsin. The Pew report controls for differences in health plan “richness” (the portion of costs paid for by employers) and household sizes but cautions against ranking one state against another because there are various state policies, physician practices and demographics that impact the cost from one state to the next.

“Because of the range of variables that influence spending, higher spending is not necessarily an indication of waste, and lower spending is not necessarily a sign of efficiency,” the report states.

The report’s findings serve as further proof for some state leaders that health reform is necessary. In New Jersey, which has one of the most expensive plans in the country, Gov. Chris Christie has been pushing for lowering the state’s portion of the burden. A week before Pew released the report, he set up an economic panel tasked with finding ways to reduce employee health-care costs. The goal in New Jersey is to lower both employer and employee costs before 2018 when states will be subject to the Affordable Care Act’s “Cadillac tax,” which will be placed on high-cost health care plans. The state has made some progress toward that goal already by gradually increasing over the course of four years how much employees contribute to their premiums, from 9 percent in 2013 to 15 percent.

But the Pew report notes that because of demographics and differences in health-care pricing, there’s only so much states can do to control costs through policy changes. What employers can control is plan richness. States cover an average of 92 percent of all costs, and 48 percent of employees are in plans that don’t have deductibles.

To control this richness, states have not only considered making employees pay more toward their premiums but also adjusting cost-sharing of services. Cost-sharing of services usually means employers offer higher deductible plans or pay less for certain services, leading employees to avoid high-cost procedures and medications as well as excessive use of the emergency room.

The report also assesses one of the more popular attempts for controlling cost: wellness programs. Wellness programs are encouraged under the Affordable Care Act, and studies have shown that they have the potential to change employee behavior and improve overall population health by targeting the causes of chronic conditions like obesity, smoking, stress, and alcohol and drug use. A 2010 Harvard study, for example, found that for every dollar invested in a wellness program, medical costs can fall more than $3 and costs associated with absenteeism can fall by $2.73.

But success stories are few and far between. According to a 2013 RAND Corporation report funded by the departments of Labor and Health and Human Services, half of large public and private employers in the United States offer a wellness program, but only 2 percent report significant savings. Many wellness plan sponsors believe they’ve saved money, improved productivity and reduced absenteeism, but most haven’t conducted a formal assessment.

Overall, the Pew report will serve as a baseline for states as they work toward reforming their health-care systems. “How states manage their employee benefits -- as well as other elements of their employee compensation package -- affects their fiscal health; their ability to recruit and retain qualified staff to deliver critical public services; and their employees’ physical, mental, and financial well-being.”