Innovation in employer health coverage: the Consumer Driven Health Plan (CDHP) at Logan Aluminum.

Hatfield, Robert D.

CASE DESCRIPTION

The primary subject matter of this case concerns a particular emerging innovation in employee health care coverage called Consumer Driven Health Plans (CDHP). Secondary issues examined include issues related to healthcare costs increases in the U.S. and other developed nations. The reactions to these healthcare costs increases are categorized, defined, and illustrated. It becomes clear from the case that they may be no easy answer to rising healthcare costs. Further, issues related to employee involvement and the strategic fit between CDHP and involved employees is explored.

The case has a difficulty level of three, appropriate for junior level or above. The case is designed to be taught in one class hour after at least one hour has been spent surveying existing approaches being used by employers to provide health care insurance coverage such as HMOs. PPOs, and POS plans. The case is expected to require one hour of preparation by students.

CASE SYNOPSIS

Healthcare costs are soaring in the U.S. and in other developed nations. The model used in the U.S. is that the government provides healthcare insurance for the poor and for senior citizens, while employers traditionally provide healthcare coverage for employees. Employers and government have tried approaches to containing the costs of healthcare insurance while still providing coverage. The government created the "health maintenance organizations" (HMOs) and the marketplace created "point-of-service" (POS) and "preferred provider organization" (PPO) plan designs. Managed care approaches were introduced into virtually all plans in an attempt to control runaway costs in recent years. Some feel that the a "free ride" approach causes consumers of healthcare to have no financial stake in the costs of health services which, in turn, makes such costs hard to control.

Consumer driven health plans (CDHPs) have emerged as plans designed to get the consumer to take a normal consumer interest in the cost and quality of healthcare service. CDHPs must have two elements: some type of medical spending account and high deductible healthcare coverage insurance. Logan Aluminum manufacturing company provides a graphic illustration of the positive elements of a CDHP with lots of additional plan elements, such a wellness, financial incentives, and free health services. Since Logan has implemented the CDHP healthcare costs have not seen the huge increases seen in the U.S. The fact that Logan uses participative management and team approaches in other areas of its operation is seen as helping to get participation and teamwork on solving the healthcare cost problems.

INTRODUCTION OF CASE

The topics of healthcare and health insurance are never far from workplace, political, or personal discussions. In 2004, health insurance costs posted their fourth straight year of double-digit increases. Over the past four years, health insurance costs have leaped 59 percent, an amount about five times faster than both wage growth and inflation. For the first time, the total annual price tag of the common PPO (Preferred Provider Organization) plans exceeds $10,000 (Salganik, 2004). Paying this amount as an insurance premium would the entire paycheck of a minimum-wage employee. At this point, the employer, on average, pays $7,526 of that $10,000, while the employee's share is $2,674 (Gabel et. al., 2004).

For 2004, employer-sponsored health insurance covers 161 million Americans under age sixty-five and nearly 12 million senior citizens. The average monthly cost of single coverage rose to $308 ($3,695 annually) for single coverage and to $829 ($9,950 annually) for family coverage. This includes PPO, HMO, and other comprehensive health insurance plans. The burden is similar for both the small and the larger employer. The total premiums paid by small firms for coverage are statistically equivalent to premiums paid by larger firms. The average contribution that small firms make toward single coverage also is statistically equivalent to the average contribution made by large firms but the small firms pay slightly less toward family coverage (Gabel, et. al., 2004). This means that large firms typically contribute slightly more towards the "family-coverage" premium.

The continued dramatic increase in the cost of health insurance is forcing employers to continue to react and innovate. One option is for employers to cut benefits. In an effort to contain costs, some firms plan to reduce or eliminate benefits altogether. Almost 40 percent of Certified Public Accountants (CPAs) in the U.S. said, in a 2004 survey, that their client's healthcare benefits would be reduced or eliminated (Genn, 2004).

Another option is to ask employees to pay more of the cost. Sixty percent of the surveyed CPAs said their client businesses are asking for additional employee contributions toward benefits (Genn, 2004). Healthcare cost increases are not just a U.S. phenomenon. Canadian healthcare costs have also been increasing at double-digit rates in recent years. Despite widespread discussion in the U.S. of how low drug costs are in Canada, prescription drug costs are currently rising dramatically in Canada. In response to these drug cost increases, 22 percent of Canadian employers said that they intend to introduce increased employee cost sharing in 2005. This means that employees will be paying more of the healthcare costs. Since Canada has a national government-based healthcare program, the coverage which employers offer is very limited when compared to the broad medical coverage offered by many U.S. employers. This means that in the employer "add-on" policies prescription drugs account for more than 70 percent of the Canadian employer's plan costs (Gonzalez, 2004). For this and other reasons, Canadians are losing faith in their governmental healthcare approach. In 1988 60 percent of Canadians felt that their healthcare system worked well, but in more recent years only 20 percent continue to share that positive assessment. In fact, a large majority of Canadians think that a fundamental change is needed in how healthcare is managed and or financed (Health of Nations, 2004).

Similar rises in medical costs in general and prescription drug costs in particular can be found around the world in developed countries. For instance, in Europe, Italy has been experiencing increases of at least 11 percent in each of the past five years (Rocchi, Addis, & Martini, 2004). Other countries in the European Community are now raising premiums and co-payment levels, both which the employee has to pay, in an effort to limit ever-rising public expenditures (Wendt & Thompson, 2004). The healthcare cost problem seems universal regardless of whether employers or the government pay for the coverage.

There have been a series of approaches to attempt to contain the cost to employers of healthcare insurance. One approach has been to demand premium "participation" of employees (Carrell, Elbert, and Hatfield, 2000). "Participation" is a euphemism for saying that employers are requiring employees to pay a portion of the health insurance premium. The days of having the employer pay all of the cost of medical insurance premiums are slipping away. Between 2001 and 2004, the percentage of workplaces that have"100 percent employer paid" premiums for insurance fell from 34 percent to 21 percent for single coverage and from 14 percent to only 7 percent for family coverage. In the 1970's the "100 percent paid" percentage for single coverage was closer to 75 percent. Employees in 2004 are paying about 16 percent of the cost of single coverage and 28 percent of the cost of family coverage (Gabel, et. al., 2004). "Participation" is certainly increasing. Another approach is continuing governmental intervention. The model used in the U.S. is that the government provides healthcare insurance for the poor and for senior citizens, while employers traditionally provide healthcare coverage for employees. Those differences have broken down in several instances. For instance, the President recently outlined a proposal where employers with 100 or fewer employees would be eligible for a refundable tax credit for contributions they make to employees' HSA (health savings accounts). The credit would apply to the first $500 in contributions an employer makes to each employee's HSA for family coverage and $200 per worker for individual coverage. Low-income individuals not covered by employer plans would be eligible for other tax credits. The credit would be available for both HSA-linked high-deductible health insurance coverage and for more traditional coverages (Geisel, 2004) such as those found in Preferred Provider Organizations (PPOs), Health Maintenance Organizations (HMOs), and other comprehensive insurance plans. Many other political proposals are being made ranging from the Canadian governmental model to smaller incremental changes.

HMOs were created by the federal government in 1973 in reaction to the medical insurance problems at that time. In fact, HMOs are the only employer healthcare plans specifically created by law. These plans must emphasize preventive care and only allow "in network" or participating medical providers and doctors to be used. These "in plan" or "in network" doctors and providers are generally found on a list. "Out of network" doctors or providers are almost never allowed. HMOs must be offered as an alternative to any other plan provided by the employer if an HMO operates in the area (Carrell, Elbert, Hatfield, 2000, p355).

For decades, employers responded to the huge increases in medical costs by implementing a variety of procedural and substantive medical plan design innovations aimed at controlling costs. These innovations were called "managed care" and included greater use of HMOs, the negotiation of preferred provider arrangements, the establishment of precertification and length-of-stay notification and approval protocols, second-opinion incentives, primary care gatekeepers and many others. Virtually all healthcare insurance plans today use some approach to cost controls and employ other cost saving measures that can be categorized as "managed".

Managed care did help moderate costs (Smith, 1990). Medical costs have increased every year since 1950. However, the medical costs paid by employers through sponsorship of group health plans actually declined between 1993 and 1996.

Plan design cannot be discussed without defining the major types of healthcare plans, especially HMOs, PPOs, and POS plans. PPOs vary widely and have no special legal requirements. They are distinctive because of one aspect of their plan design: they will pay "out of network" doctors and providers, but usually at a discounted rate. For instance, a PPO may pay 80 percent of an "in network" doctor's charges, but only 50 percent to an "out of network" doctor. Therefore, the PPO prefers its own "in network" providers, but will pay others. The HMOs will not (Carrell, Elbert, Hatfield, 2000, p356).

Both HMOs and PPOs were reactions, in a sense, to what are called point-of-service (POS) plans. POS plans allow the covered person to use any provider or doctor as long as the fee is "reasonable and customary" and is an approved medical procedure. Typically, the patient must pay a front-end deductible, perhaps $250 per person, then a co-payment of perhaps 10 or 20 percent. Like HMOs and PPOs, POS plans seek to negotiate or minimize the charges of doctors and other providers. It seems that all plans now have elements of managed care (Carrell, Elbert, Hatfield, 2000, p354).

Certain positive aspects of the HMOs, like preventative health testing and intervention, have been copied and used in some PPO and POS plans. However, HMOs have been demonized in headlines and even made-for-TV-movies for its cost controlling mechanisms. For instance, there has been a negative reaction to having a plan administrator occasionally refuse to authorize for payment a procedure or treatment prescribed by a physician. The reaction against managed care-type restrictions has been a series of new laws and regulations designed to restrain restrictive practices. Employers and insurers of managed care plans also face a risk of lawsuits.

These anti-managed care developments are already creating direct costs for insurers and employers. Some think that laws and litigation will lead to insurance costs and disruptions so significant that the costs savings built into such plans will be nullified (Kelly, 2003). There is no reason to believe this trend of anti-managed care legislation and litigation will reverse. Responses to these new risks to insurers and employers have included efforts to place new limits on employer liabilities and reduce employer involvement in plan eligibility, coverage and reimbursement decisions.

There have been a series of plan design proposals that are described as converting group health plans into "defined contribution" health plans or "consumer-driven health plans" (Kelly, 2004). What is meant by consumer-driven? Simply stated, it is the process of making an informed purchase with one's own money that results in getting the best value for the needed good or service. In applying this concept to our present health care delivery and insurance coverage system of HMO, PPOs and POS plans, consumer-driven behavior is virtually nonexistent (Halterman, Camero, and Maillet, 2003). For example, how often do patients ask the doctor, hospital, or other provider what the alternatives are and how much each costs? Generally the answer would be "not very often" since the patients do not perceive that they have a financial stake in their healthcare. They are comfortable in being detached from the financial aspects of today's expensive and advanced healthcare. They could be considered "free riders" where it is someone else's problem to worry about the expense. There has been considerable interest in consumer-driven health plans (CDHP) over the past few years. The plan details generally include two elements: a fairly high deductible, perhaps $1,000, and a medical savings account. This CDHP approach is growing. In 2003 only about 5 percent of firms reported offering a high-deductible plan to their employees, but this number doubled to 10 percent in 2004, including 20 percent of the largest firms (those with 5,000 or more employees). Thirteen percent of workers in all firms (and 19 percent of workers in large firms) that offer health benefits work for employers that now offer a high-deductible plan to at least some workers (Gabel et. al., 2004). However, not all of these firms offer what is considered the second component of a CDHP-the medical savings account.

The theory behind CDHPs is that by empowering consumers by giving them more power over their own health care decisions and providing financial incentives to make wise financial health service decisions, health care costs will be better understood and therefore controlled. Proponents of CDHPs believe that patients have been largely kept in the dark about alternatives and the costs of health care (Meyer, 2004). Employees often think of their healthcare as free and are unaware of any objective information about either the fees or quality pertaining to the healthcare they receive. Advocates of CDHPs believe that we need to move from today's system of a medical benefit model to a real insurance model.

There are some concerns about CDHPs. Some observers believe that CDHPs might merely shift health costs from employers to employees leaving the structural and fundamental problems unaddressed. CDHPs may shift costs to providers if the patient is unable to pay his/her portion on the medical bills. Many think that some overall shift to providers would be a positive development. CDHPs may reduce the use of appropriate preventive and primary care services. Finally, without the availability of quality and efficiency information, employee consumers will be unable to make appropriate decisions about providers, drugs, and treatments (Meyer, 2004).

THE CASE OF THE CDHP INNOVATION AT LOGAN ALUMINUM

Logan Aluminum is located in south-central Kentucky about 60 miles north of Nashville, Tennessee. Logan is located in a rural setting with one community-based hospital, many medical providers locally, and access to larger hospitals and specialty physicians in Bowling Green, Kentucky and Nashville, Tennessee, both about 30 minutes away. Logan has a workforce of about 1000 employees with an average age of 43. Almost two-thirds of Logan employees have ten years or more of service. The Logan plant opened about 20 years ago. Employees tend to stay at Logan. One strong indicator of this is that the turnover rate in 2003 was only 4 percent.

After experiencing large increases in healthcare insurance costs again in 2002, like the rest of the U.S., Logan decided to make a major change to its healthcare plan design for 2003. The company moved to a CDHP model for its entire workforce. The two most expensive benefits for Logan are healthcare and pensions. Logan spent over $7 million for healthcare in 2004, which is about $7,000 per employee.

Logan believes that simply implementing the two elements of a CDHP alone will be insufficient to stem the tide of healthcare costs on the long term. While the Logan plan does include both CDHP components of a high insurance deductible and a medical savings account, the Logan plan is actually a broad and integrated approach involving multiple coordinated elements. The key elements include the innovative CDHP plan details, the wellness program, the health screening and interventions, and the financial incentives.

Employees at Logan are encouraged to take advantage of preventive care services, like blood work, x-rays, mammograms, and physicals. All preventive services are at no cost to employees and are offered through the medical department set up on-site at Logan. The medical department staff includes two RN's, a part time physician, and additional support staff. Employees can also use preventive care options outside Logan's on-site medical department without using spending dollars from their medical account or being "out-of-pocket".

Employees at Logan are not required to pay part of a monthly premium for their healthcare. Logan is perhaps the only employer in its area that does not require such premium participation. Instead, at the beginning of each year, the company sets up an account for each employee, based on family size. Over one-half of the employees need family coverage. At Logan the family model covers the employee and two or more dependents. At the start of the year, $800 is made available in each employee's family healthcare reimbursement account for those with family coverage. Less is provided to those with single coverage. The money can be spent for any necessary medical services, such as doctor visits, lab tests, emergency room visits, and hospital care. This means that there are no co-pays or deductibles for the first $800 of medical services. Employees are encouraged to spend the $800 wisely.

During the year, if the family spends the entire $800 for medical services, the employee then must pay the next $1,200 out of his or her own pocket. This can be considered the "employee bridge" between the two parts of the employer's coverage. The employer covers the first $800 and provides 100 percent coverage after costs hit $2,000. Therefore the employee pays the "bridge" amount if it becomes necessary.

Employees are offered the IRS Section 125 "flexible spending account" option to cover the $1,200. Dollars contributed to such a flexible spending account through the employee's pretax deduction approach are free from federal, FICA, and state taxes. This translates to a real (net) dollar savings of between 30 and 40 percent compared to the option of paying for medical services with normal after-tax dollars. Only a third of Logan employees use this flexible spending account contribution method since the IRS regulations require that any unspent dollars accumulated in the account at the end of the calendar year must be forfeited to the IRS. Most employees are gambling that they will not need to spend the $1,200.

For the employees whose family spends the entire $800 from the health account and then spends the next $1200 out of their own pockets, employer-provided insurance then picks up and pays 100 percent for any medical services for the balance of the year. This illustrates the high deductible element of the typical CDHP. The CDHP can be seen as an insured healthcare plan that includes a $2,000 deductible. Of course the initial employer contribution toward this deductible is the first $800 of medical expenses that is followed by the "bridge" of the next $1,200 out of pocket cost to the employee. The plan looks like this: $800 employer paid followed by $1,200 employee paid followed by 100 percent of further costs paid by the employer.

From the standpoint of the employee, the employer is paying for all diagnostic testing, and the first $800 and all the rest of the healthcare costs after he or she pays the bridge in years where his or her medical costs are high. This bridge is what employees will seek to minimize. However, the bridge itself can be lessened according to the details of the Logan CDHP. If the family does not spend all the dollars in their account in any year, the unspent dollars are rolled over to the next year. For example: if the family has a good year in 2004 and only spends a total of $300 for medical expenses, the account balance or residual of $500 is rolled over into 2005. If the account balance was $800 at the beginning of the year, and $300 was spent, then $500 will be rolled over. In January 2005, the company will place another $800 in the account so that the starting balance in January 2005 is now $1300, instead of $800. Therefore, this means the maximum out of pocket expenses for the family is $700 for 2005, instead of $1200.

If an employee has enjoyed good health and has accumulated several hundred or possibly several thousand dollars, Logan's CDHP allows the account balance to pay for medical expenses during retirement years.

The success of the Logan CDHP is driving expansions. One modification in 2005 is that the employees now have an option to receive actual dollars in a "health savings account" (HSA) instead of "notional" or "on-paper-only" dollars under the current health risk reimbursement arrangement. Employees will be able to contribute pre-tax dollars to their account as well, without the fear of losing the money as is the case with Section 125 flexible spending accounts where any unused dollars are forfeited. All unused dollars, whether contributed by the company or by the employee, will grow for future use. In 2005, the HSA option also includes pharmacy that is a stand-alone plan under the current health reimbursement account.

Logan goes far beyond the minimums of a CDHP of a health spending account and high deductibles. For instance, Logan initiated its wellness program in 1993. It hired a full time wellness coordinator and began offering varied wellness services. Logan believes that its employees are healthier as a result of wellness efforts. Asking employees to practice wellness and make critical life style changes can be seen as a win/win situation. Logan encourages free annual physical exams and blood work, along with exercise, diet, and weight control.

Logan sees obesity as the next major emphasis in controlling healthcare costs. In Kentucky, where Logan is located, almost 70 percent of men and 55 percent of women are overweight or obese. Only 29 percent of Kentuckians get the proper amount of physical activity. About 20 percent of high school boys and 10 percent of high school girls are seriously overweight. The numbers for Kentucky are high but reflect an escalating trend in most every state in the United States. Kentucky ranks fourth in the nation for prevalence of obesity among adults and also has the fourth-highest death rate from heart disease, the fifth-highest percentage of adults with high blood pressure and the second-highest percentage of adults with arthritis. A recent report said obesity is responsible for $75 billion in medical expenses nationally and $1.1billion in Kentucky. Obese adults are said to have medical expenses 35 percent higher than adults of normal weight, pushing up overall healthcare costs (Ungar, 2004).

Employees have been told that each newly diagnosed case of diabetes in a young to middle age adult will cost $250,000 in healthcare cost over the person's lifetime for medical treatment. This means that the minimizing risk factors that can accompany its wellness program should provide a substantial financial payback. However Logan emphasizes the personal or "human" payback is for those who change their lifestyle. The quality of life and the outlook for less disease can be greatly improved through wellness activities.

In an effort to address obesity and other risk factors, Logan set health status and behavior targets in 2003 for its entire workforce. To help reach the targets, it offered employees up to $250 in cash incentive, depending upon healthcare dollars saved, in five areas:

1. Body mass index (proper ratio of weight to height)

2. Exercise activity at least three times per week

3. No tobacco use

4. Using seatbelts while on the road

5. Getting an annual wellness consultation

The centerpiece of the health screening and intervention element is the health risk appraisal. The health risk appraisal (HRA) is a series of about 40 questions related to exercise, diet, health conditions, family history, and includes some biometric data such as blood pressure, cholesterol level, glucose level, etc.

Employees who complete the HRA get a report based on how they answered the 40 questions. If the results of the HRA indicate that an employee has multiple risk factors, individual counseling by an outside (non-Logan) health services provider is offered to the employee on a voluntary basis and at no cost to the employee. Multiple risk factors could include: being overweight, having a family history of heart disease, cancer, or other serious health conditions, having elevated blood pressure, limited physical activity, elevated cholesterol, glucose, or triglycerides, etc.

Depending on risk factors, an individual counselor works out a confidential action plan with the employee in an attempt to lower or eliminate some risk factors. While certain risk factors that are beyond the control of an individual (e.g. age, family history, and genetics) many risk factors can be mitigated by diet, exercise, medication, and lifestyle changes. Logan has about 250 employees, 25 percent of the workforce, who are targeted for special help through an intervention counselor. While the intervention program is voluntary for all employees considered at risk, nearly 90 percent do accept intervention help from an external counselor.

Logan receives aggregate data from the HRA vendor that is the yardstick it uses to determine progress. The data is also used in determining the efficacy of the wellness incentives.

The staff at Logan's on-site medical clinic has identified a number of diseases in the early stages that were caught during preventive physicals. Several cases of cancer, diabetes, and other conditions were identified, even without the employee having serious symptoms. Dependents of employees are offered free health screenings as well during an annual wellness fair. In 2004, nearly 50 percent of spouses of employees participated in wellness consultation, blood work, and x-rays. The free mammograms have identified early breast cancer in a number of female employees and dependents. The belief is that that early detection and early treatment will save money on the long-term and affords employees a better disease outcome in addition to avoidance of suffering and pain

One incentive is tied to the health screening and intervention element. Each employee receives $200 in their health spending account if they complete the annual health risk appraisal discussed above. In 2003, 99.7 percent of Logan employees completed the health risk appraisal. This $200 can be seen as lowering the cost of the out-of-pocket bridge.

A second incentive is tied to wellness, as discussed above. Half of the wellness incentive was tied to actual dollars spent by the company for healthcare. If the target spending level was reached, employees were rewarded with part of the savings, up to $125 per employee.

At the end of 2003, Logan had achieved most of the healthcare cost and wellness targets. Each employee received a check for $220 that included both the savings and a direct payment. Logan sees this cost as a wise investment in its human capital. It explained to its employees that if these incentives can help eliminate or minimize one case of diabetes, serious heart attack, stroke, or other major life style illness, the financial and human payback is well worth the investment.

Whether CDHPs are successful may be determined in part by how this innovative approach fits with the other elements of the employer's human resource and general management approaches. There appears to be a good fit with the HR and management theories employed at Logan. Logan has a team-based culture that emphasizes employee involvement in nearly every facet of its operation. Employees are viewed, and referred to, as "partners". Placing more decisions in the hands of partners, whether about healthcare or not, is consistent with the empowerment and team-based philosophy under which Logan manages. Leaders at Logan can be viewed as "path-goal" leaders (House, 1971) in that they are highly engaged, with the help of employees, in clarifying the target behaviors and outcomes and serve as resources to help along the path. Within such a management model, communication and employee involvement are key. Alternately, an employer running an autocratic, individual-based, directive management style may find that the fit of a CDHP would be less comfortable and effective, at least upon implementation.

Logan utilizes a 20-member task force in which employees are engaged in thoughtful discussions several times a year concerning healthcare costs and wellness. This group of employees is then expected to share information with other employees in their work group and team. This is a team-based approach aimed at keeping every employee aware of healthcare issues. Further, healthcare spending and wellness are discussed in face-to-face quarterly communications meetings with all partners. In these meetings healthcare cost is discussed as a controllable expense partially determined by partners being engaged in healthcare issues and acting as wise consumers.

Early reports indicate that the first year, 2003, healthcare costs were either stable or showed a slight decrease. Logan partners, company managers and officials, along with many outside of Logan are eager to analyze more data from 2003 and also find out what happened in 2004, the second year of the CDHP. Observers wonder if the benefits seen in the first year can be repeated in the second year, or whether the first year may have merely squeezed out some efficiencies that caused a temporary effect. This innovation in healthcare approaches at Logan is becoming a naturalistic experiment on CDHP that hopefully will shed some light on this very important of employer healthcare costs.

ACKNOWLEDGMENTS

The authors would like to thank Logan Aluminum for its cooperation in this paper. Many of the facts related to the case of Logan Aluminum were derived from personal interviews with Logan Aluminum Human Resource managers and the following two documents:

"The Performance and Potential of Consumer Driven Health Care." Testimony before the Congressional Joint Economic Committee: Wednesday, February 25, 2004 by Howard Leach VP of Human Resources, Logan Aluminum, Inc. http://jec.senate.gov/_files/Leach02252004.pdf

"Controlling Health Care Costs: A Successful Aluminum Industry Initiative." Speech prepared for The 71st Aluminum Association Annual Meeting October 18, 2004 by Howard Leach VP of Human Resources, Logan Aluminum, Inc. Unpublished document.

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Robert D. Hatfield, Western Kentucky University