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September 19, 2011

Purchasing High Performance Archive 7ba427cd-495c-4e06-82ee-8d5610c73fb2 Column

Newsletter Article


A Note from CMS Administrator Dr. Donald Berwick on The Partnership for Patients

By Donald Berwick, M.D., Administrator, Centers for Medicare and Medicaid Services

America has doctors, nurses, and hospitals second to none in the world. Every day, countless Americans receive superb care. But it's also often true that—for many patients—quality falls short of the highest standards.

Most of us wouldn't get on a plane that had known lapses in safety or whose pilot skipped the checklist. It's no more acceptable to overlook safety as a top priority in health care.

Nevertheless, on average, one of seven Medicare beneficiaries is harmed in the course of a hospitalization, costing the government an estimated $4.4 billion every year. A study published in April 2011 in the journal Health Affairs found, on average, one of three patients admitted to the hospital suffer a medical error or adverse event. These rates take a heavy toll. They are not due to deficiencies in the workforce. That is, they are not the fault of the doctors, nurses, managers, and staff who try hard every day to protect patients from the risks of complications in their care.

Nonetheless, the toll is unnecessary. The risks and harms to patients come from flaws in the design of the health care system, itself. Even the most committed professional can't make up for a system that leaves a patient on his own once he leaves the hospital or that lacks built-in safeguards to ensure patients don't get the wrong medicine, protect surgical wounds from infection, and make it easy and reliable for clinicians to wash their hands.

With hard work and ingenuity, we can continue to encourage all that is right about American health care while we work to fix what is wrong. It will take universal recognition that improvement is necessary and possible, along with clear vision and strong leadership for how we can get there.

That's where the Partnership for Patients comes in. It's a unique public–private partnership among those who provide care, receive care, and pay for care. It's a true collaborative effort.

Private and public stakeholders have pledged to reduce harm in hospitals by 40 percent in the next three years. This includes reducing the number of preventable in-hospital medication errors, central line–associated bloodstream infections, patient falls, and other injuries. It also intends to help patients heal successfully after discharge, so they don't have to go back to the hospital. We aim to reduce 30-day hospital readmissions by 20 percent over the next three years by targeting unnecessary return admissions.

Better, safer, cost-effective care will come from improving quality. In business, we see it all the time. Computers today do more than ever, at a continually lower price, as do cars, televisions, and telephones. Air travel is ultra-safe today in part because we've designed planes and systems that protect pilots against inevitable human error.

The Partnership for Patients has the potential to save up to $35 billion in health care costs in the next three years, including up to $10 billion for Medicare. Over the next 10 years, the Partnership for Patients could reduce costs to Medicare by about $50 billion and lead to billions more in Medicaid savings.

Hospitals across the country already are proving that this strategy works:

  • Ascension Health—the country's largest nonprofit system—reduced its preventable deaths by 1,500 annually. As a result, malpractice costs dropped 36 percent between 2005 and 2010.
  • Denver Health has been able to save over $100 million and achieve the lowest case-mix adjusted mortality among all the members of the University Health System consortium.
  • Virginia Mason Medical Center in Washington State went from 34 cases of ventilator-associated pneumonia in 2002 at a cost of $500,000, to one case in 2005, at a cost of $15,000.

National Business Coalition on Health (NBCH) members are critical to this effort. NBCH was out in front early, marshaling corporate America to promote value-based purchasing. To make gains in patient safety across the country, we need the kind of leadership NBCH knows how to provide.

No one in the health care system can do this alone. Simply telling America's doctors and nurses to "try harder" to make patients safe would be like asking pilots not to crash. It's not the people that create the hazards; it's the design of the systems in which the people work.

Hospitals, doctors, nurses, pharmacists, health plans, patient advocates, patients and their families, and employers. When it comes to improvement, we're all in this together. If you haven't already joined forces with the Partnership for Patients, take the pledge at now.

Already, more than 5,000 organizations—including nearly 2,500 hospitals—have pledged their support for the Partnership for Patients. We should not stop until every health care purchaser and provider, worker and employer, patient and family member makes it their top priority to advance health care that is safe, efficient, and helping to keep our country well.


Hospital Compare 

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Perspectives on Policy

Newsletter Article


Will Employers Drop Health Coverage in 2014? Or Just the Opposite?

By Brian Schilling

The single biggest test of the overhaul of the nation’s health care system doesn’t come for more than two years, but that hasn’t stopped researchers and pundits from speculating about how employers will respond to the launch of more than 50 regional health exchanges. Will employers drop coverage and push workers to exchanges? Will the status quo reign? Will levels of employer-sponsored coverage actually increase? Studies and surveys on the subject aren’t hard to find, but they are hard to reconcile. Just since June 2010, there have been at least seven surveys on the subject.1 So, will 2.7 percent of employers drop coverage as this survey suggests? Or will 18.8 percent drop coverage, as this survey, conducted one month later, suggests? Or were researchers at RAND correct when then calculated in late 2010 that employers would offer coverage to an additional 13.6 million workers once the exchanges, penalties, and various subsidies are all up and running?2

Beginning January 1, 2014, when the exchanges open their doors, speculation will finally give way to observation. Large employers won't be eligible to participate directly until 2017, but that still leaves the possibility that they might drop coverage and nudge, guide, or direct employees to join on their own. If they don't drop coverage—or if more employers choose to offer coverage—the reform effort will have been vindicated on a key point. It will have been proven possible to offer a viable, government-organized mechanism for extending coverage to individuals and small employers alongside the market-based system without necessarily undermining the market. On the other hand, if employers do begin to drop coverage in significant numbers, we may be on the front end of a broad national trend away from employer-sponsored health benefits.

Don’t expect a quick resolution.

"Nothing is going to happen overnight," says Paul Fronstin, Ph.D., director of the health research and education program at the Employee Benefit Research Institute. As a comparison, Fronstin points out that the shift away from employer-sponsored early retiree health benefits took nearly 20 years to go from the point A to B. In the past, 40 percent of large employers (i.e., those with 500 or more workers) offered it to employees; now, about 20 percent offer it. The widespread adoption of managed care took roughly as long.

Many observers are looking to Massachusetts for insight on the question of what will happen in 2014. In 2006, Massachusetts passed a state health reform plan (also featuring an individual mandate, penalties, and a statewide exchange) that served as a model for the national effort. Since then, the percentage of individuals between ages 18 and 64 in the state with any form of health insurance has increased markedly, from 87.5 percent in fall 2006 to 95.2 percent in fall 2009, despite a protracted, statewide recession.3 Notably, during that same span, the percentage of individuals receiving coverage through their employers also increased, from 65.7 percent to 68.3 percent. State residents also reported increased satisfaction with their health coverage.4

"A lot will hinge on the state of the economy in 2014," says Bill Kramer, executive director for national health policy at the Pacific Business Group on Health (PBGH)."But regardless of how weak or tight the labor market is, I doubt that most large employers will be eager to drop coverage. Most of them view health benefits as critical for employee recruitment and retention, and they're not going to want to give away that tool by shifting the responsibility for designing and managing health benefits to brand new public entities."

Fronstin is quick to note that he's not comfortable predicting what employers will do in 2014 and beyond, and that those who are comfortable making such predictions probably shouldn't be. But he does offer a short list of factors that large employers will be considering as they make their decisions. In order of importance, they are:

  • Early adopters' experiences. Whenever a new survey on the subject comes out Fronstin tends to look at the small numbers first. "There's never a zero," he says, meaning that no survey thus far has found that zero percent of employers are considering dropping coverage. That, he says, is significant. "Employers that actually do drop coverage will be watched carefully and they'll talk to other employers. If they save money, don't lose or alienate employees, and otherwise have a seamless transition, others will certainly follow." At least three different surveys conducted since June 2010 have found that if some employers drop coverage, a great many more will at least consider following suit.5
  • Cost. There is no simple or standard way to calculate the cost to employers of dropping coverage and encouraging employees to seek it on their own through the exchanges, but the bottom line will certainly weigh heavily on many employers. At first glance, dropping coverage might seem like a reasonable cost-cutting strategy. After all, the penalty for not providing coverage is only $2,000 per employee and the average cost of providing coverage is almost $10,000. That $8,000 differential is quickly eaten up, however, by the costs associated with increasing the salaries of employees (especially those not eligible for premium subsidies) so they could afford to purchase coverage on their own. The higher salaries alone would tip the balance in favor of maintaining coverage for some employers; on top of that, employers that drop coverage would also face higher Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare.
  • Recruitment and retention. The state of the economy in 2014 will be a major factor in how health benefits might affect recruitment and retention of key employees, says Fronstin. Even at the present 9 percent unemployment rate, there's still tough competition for talented workers, and workers consistently rank health benefits as the most important employer-based benefit.6 "No employer will want to be the outlier that doesn't offer good benefits, unless the economy takes a turn for the worse," he says. If the economy slows down and unemployment ticks up significantly, though, all bets are off.
  • Concerns about productivity. Also on employers' list of factors to consider is whether moving employees to the exchanges will have an adverse impact on productivity. Large employers have embraced the idea that healthier workers are more productive workers and many will be loathe to cede responsibility for keeping workers healthy to an untested, government-run exchange. "Quality-conscious employers would need to feel comfortable that exchanges have the same focus on wellness that they do before they could really feel comfortable moving employees to the exchanges," said Fronstin.
  • Viability of the exchanges. Many key aspects of the exchanges remain unknown at this point. How much will they cost? Will adverse selection make them unstable? Will enrollees be satisfied with the plans? Employers will look at these and other factors to determine their comfort level with a given exchange. But because states are being given a high degree of flexibility in terms of designing and managing their exchanges, employer reaction can be expected to vary considerably from state to state.

PBGH's Kramer adds another factor to the list: administrative hassle. "For multistate employers, it's going to be very difficult operationally to drop coverage and push employees into the exchanges," he said. "Unless there is a reasonably high degree of standardization, the exchanges are likely to vary from state to state in terms of eligibility and enrollment procedures, premium processing, and so on. Multistate employers won't want the hassle of explaining to their employees how to enroll in exchanges if every state has a different approach."

Don't expect the chatter—or the steady stream of surveys—to go away any time soon. But don't pay too much attention either, says Fronstin. Writing in a recent blog post, Fronstin concludes that, "There is no reason to believe that any survey conducted today can be used to determine the percentage of employers that might be dropping coverage three or more years from now."


1 R. Coccia, "Survey Finds Employers Are Unlikely to Drop Health Care Benefits," Workforce Management, April 2010; S. M. Natchek and C. J. Kabacinski, Health Care Reform: What Employers Are Considering, (Brookfield, Wis.: International Foundation of Employee Benefit Plans, May 2010); Towers Watson, Health Care Reform: Looming Fears Mask Unprecedented Employer Opportunities to Mitigate Costs, Risks and Reset Total Rewards, (New York: Towers Watson, May 2010); Fidelity Investments, "Fidelity Investments Survey Finds Majority of Employers Rethinking Health Care Strategy Post Health Care Reform," July 29, 2010; HR Policy Association, "2010 Summer Chief Human Resource Officer Survey: Questions on the New Health Care Law," Sept. 2010; HR Policy Association, "2011 Annual Chief Human Resource Officer Survey," March 2011; Lockton Companies, Employer Health Reform Survey Results, June 2011.
2 C. Eibner, P. S. Hussey, and F. Girosi, "The Effects of the Affordable Care Act on Workers' Health Insurance Coverage," New England Journal of Medicine, Oct. 7, 2010 363:1393–1395.
3 S. K. Long and K. Stockle, "Massachusetts Health Reform: Employer Coverage From Employees' Perspective," Health Affairs, Nov./Dec. 2009 28(6): w1079–w1087.
4 Ibid.
5 Fidelity Investments, "Fidelity Investments Survey," 2010; HR Policy Association, "2010 Summer Chief Human Resource Officer Survey," 2010; Benfield Research, Special Report: Employers and Healthcare Reform, 2011.
6 Eibner, Hussey, and Girosi, "Effects of the Affordable Care Act," 2010.


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Case Study

Newsletter Article


The Scooter Store Saves Big by Focusing on High-Risk Individuals

By Brian Schilling

Three years ago, when Deanna Scott, vice president of human resources and corporate operations for the Scooter Store was busy establishing the organization's wellness program, a report came across her desk which, in a disturbing way, confirmed the "ordinariness" of her firm. It showed that 82 of the company's 2,700 employees accounted for about half the organization's overall annual claims.

Scott wasn't surprised. Nationally, the most expensive 5 percent of patients generally account for about 50 percent of all health care costs, but seeing the report still set off alarm bells.1

"Even with blinded claims data, when you're looking at a summary of the high-cost cases for your own firm, you can't escape thinking that there are real people behind those dollar figures who need help that they may not be getting," says Scott.

The Scooter Store prides itself on being a great place to work— the manufacturer of scooters for the mobility impaired was twice ranked by Fortune as one of the nation's 100 best workplaces. Scott's first reaction upon seeing the data was to commit herself to making sure the organization's wellness program would make a real difference to employees.

Claims Data Paint a Picture

The report that Scott received, which showed a decidedly lopsided distribution of health care costs among her employees, came from WellNet, one of a growing number of vendors that offer claims data analysis and predictive modeling services. WellNet President Keith Lemer explains, "If companies have access to claims data—and every company really should—data analysis and predictive modeling can tell them what their top health care issues and costs are going to be down the road."

A 2011 New Yorker article showed the potential of using those data to cut costs. The article profiled the experiences of an initiative in Camden, New Jersey that used outreach to very sick patients to cut the hospital bills of 36 so-called "super-utilizers" by 56 percent. A similar effort in Atlantic City, New Jersey cut medical costs among casino and hotel workers by an estimated 25 percent while markedly improving the health of the more than 1,200 patients involved in the effort.

But getting claims data can be hard and expensive. When asked about the difficulty in getting health plans to share data or provide real-time access, benefits consultant Bill Lavis of the Oakland-based firm Sitzman, Morris and Lavis, Inc. said, "It's a huge headache. You'd be surprised how many firms sign contracts saying that they don't actually own the data for their own employees. Plans really want to hold onto it in many cases. They don't necessarily want you to be able to see the difference between claims costs and your premiums." He went on to elaborate that self-insured employers are likely to have an easier time getting their own data, but that they should expect to pay for it.

Claims data are blinded, of course, so reports from vendors don't ever say which employee has what problem, but they can still be fairly specific. "We can tell you you've got X people with diabetes, Y with serious heart conditions, and Z with psychosocial issues," said Lemer.

Lemer says the most important data are pharmacy data. "Pharmacy data are available immediately, they're unambiguous, and they're highly accurate," he says. "For medical data, you might wait 60 days before you see a claim and by that time the subsequent cost you might want to try to prevent has already occurred."

Finding Candidates for Outreach

WellNet uses the Scooter Store's pharmacy data to look for good candidates for personalized outreach. For instance, if a patient has a claim for hypertension, then fills a prescription for diabetes medication, and later seeks reimbursement for an inhaler, that patient gets flagged as having a high probability of experiencing serious medical conditions in the future, such as a heart attack or stroke. "If you can prevent that person from having a heart attack by helping them up front," says Scott, "you've done some real good and you're also saving a ton of money."

Many serious health conditions can be recognized by patterns in the claims data archive. Wellnet and other firms use software to recognize these patterns and engage members at the earliest possible point.

Other claims patterns are also apparent—a diabetic not filling her prescription routinely, a patient with a heart condition who hasn't had a stress test in two years, a recently discharged patient with substance abuse issues who has missed all follow-up visits. Such patterns allow WellNet and similar companies to fairly accurately predict the health issues that are likely to crop up in the future. "With enough data," says Lemer, "we can provide you with a very good forecast of what health problems your employees will be facing over the next two to five years."

In a frank moment, Lemer acknowledges that such reports are not useful on their own. "Many analytics firms can do predictive modeling and do it well," he says. "It's what you do with the reports that makes a difference."

The Scooter Store's Approach

With the support of management, Scott mapped out an aggressive wellness program with many different components, all working together under the firm's "Live, Work, Be Well" initiative. The program is designed with all Scooter Store employees in mind, not just the most expensive "high users." Highlights of the program include:

  • voluntary, free health risk assessments and biometric screening for all employees to help identify health issues;
  • an annual health fair;
  • "Be Well Bucks," which are earned for activities like committing to regular exercise or participating in selected wellness efforts; Be Well Bucks can be applied toward the employee's monthly premium contributions;
  • access to a broad range of support groups, counseling, and educational materials on issues such as obesity, tobacco cessation, diabetes;
  • a full-service on-site clinic that makes it easier for staff to access medical care and cut down on time spent away from the office; and
  • available one-on-one case management for all high-risk conditions.

Scott says that what makes the program work is not simply that good care is available, but that the Scooter Store markets it aggressively.

Selling Help

"We don't pull any punches when it comes to getting people to come in for the care they need," says Scott. "We're comfortable being very aggressive in that regard. I'm not afraid to call someone who hasn't responded to repeated contacts from our vendor to say, 'Hey, I don't know what you're dealing with, but we pay those vendors to make sure you get the care you need. They're on your side. Please call them back."

The response, she says, has been overwhelmingly positive.

The art of encouraging beneficiaries to participate in available disease management or other programs must be practiced in a way that complies with the Health Insurance Portability and Accountability Act of 1996, which makes it illegal for employers to receive identifiable health information about employees (See Related Article.). But the law doesn't bar third parties from doing essentially the same thing.

In the case of the Scooter Store, that third party is WellNet. "The value that we sell is highly targeted member engagement," said Lemer. The engagement rate at the Scooter Store is around 35 percent, which is quite high by industry standards."

To achieve that level of participation, WellNet relies on everything from kiosks at the company health fair to newsletter articles to text messaging to phone calls to mailings. "There's no one approach that will work for a given population. You can't reach a 25-year-old the same way you reach a 55-year-old. The messages are custom, the medium is unique, even the timing is different."

For the Scooter Store, the key to effectively promoting the wellness program has been to work with WellNet to segment its employee population across several different strata, including age, income, gender, retired/working, etc. Each distinct segment gets its own unique pitch with messages, incentives, and penalties designed with them in mind.

"Blanket approaches to outreach across an entire population aren't as effective," explains Lemer. "Highly paid executives won't respond to a $150 incentive the same way a younger (and less highly compensated) employee will. But give them a $150 penalty for not filling out a health risk assessment and the response rate might hit 70 percent."

Scott recalls feeling somewhat anxious about pushing the program too hard when it was first launched. "We were a little fearful of employees reacting from a Big Brother standpoint: 'You're invading my life. You're going to know everything about my medical condition, and that's way too personal," she says. That was never the case, of course. Scott has never seen personally identifiable health information about her employees and doesn't want to.

Two years in to the effort, Scott is no longer anxious about pushing the program too aggressively. "At this point I think what we really need to do is just communicate more often and in different ways and do a better job of promoting it at health fairs and things like that, which we're now doing."

Churn at the Top

It is a little-known fact that there is a high degree of "churn" among high-cost individuals. That is, people who are high utilizers of health care one year may not be high utilizers the next year. A 2003 study found that of all people ranked in the top 5 percent in terms of health care expenditures, only 34 percent were again in the top 5 percent the following year. In other words, roughly two-thirds of the highest-cost individuals for any given year were low-to-moderate users of health care the previous year.3

For employers hoping to prevent health issues from becoming more serious (and more expensive) in the future, the implication is clear. You need to monitor claims data on close to a daily basis or you'll constantly be playing catch up. High-cost employees are not a static group.

The Scooter Store does monitor claims daily, albeit through a vendor. "If someone fills prescriptions for a beta blocker, cholesterol medication, and a diuretic, it is a good indication that they would benefit from some communication directing them to the resources of our wellness program. If our vendor learns about that the next day, they can really do something with that information," says Scott. "But if they learn about it at the end of the year, they've missed the window."

Because the ongoing data monitoring is HIPAA-compliant, Scott is out of the loop on a day-to-day basis. "We have WellNet coordinate with our large case management vendor and they are empowered to work together without our intervention. We just want to see that people who need to be managed are managed, and that's clearly happening."

The Results

For the Scooter Store, the savings have been striking. Year-over-year claims costs from 2009 to 2010 went from $6,600 per employee per year to $5,400, a 22 percent reduction that translates to $2.3 million in savings.

But Scott says those aren't the results that matter most. "One of my managers who has struggled with weight issues for a long time sent me an e-mail recently saying that he started taking walks in the evening as a result of all the outreach we did. He ended up losing 103 pounds over the next year."

At the Scooter Store, Scott believes the best is yet to come. "It's hard to say which piece of the puzzle saved what amount of money. But in the aggregate, we're off to a great start."

1 A. C. Monheit, "Persistence in Health Expenditures in the Short Run: Prevalence and Consequences," Medical Care, July 2003 41(7):53–64.
2 Ibid.
3 Ibid. The same study explains that while care for chronic conditions, such as diabetes and asthma, is indeed fairly expensive, such care alone will not put individuals with those conditions at the very top of health care spenders. Acute episodes or complications, by contrast, certainly will.

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Can Smaller Firms Self Fund? Surprise–Many Already Are

By Brian Schilling

Nine years ago, when David Kohmescher stepped in as chief executive officer of the Newburgh, Indiana-based Women's Health Care, the 20-physician obstetrics–gynecology practice was in its first year of being self-insured. His immediate predecessor had led the organization through the transition from fully insured to self insured for what Kohmescher said were the usual reasons: cost, lack of control, general frustration.

"Costs were going up every year and the organization never had the freedom to build the plan it really wanted," said Kohmescher. "I think the general sense among our owners was 'Hey, we're well established, we have good cash flow, and we are doctors and know health care. We're good candidates for this.' That has certainly turned out to be the case."

Kohmescher's conclusion that self-insuring was a good decision comes despite the fact that in many ways, the practice might not seem like an ideal candidate, especially retrospectively. It had one very bad claims year in terms of costs. Three employees have died in the past decade. And the firm is small in comparison to the usual self-insured entity: only about 80 of the firm's 120 employees participate in the health plan.

None of that has made self-insuring tenuous or, as one might expect, cost-prohibitive. "We've saved money every year versus buying a fully insured product on the open market, including the one year where we had to cover costs of one catastrophic case that ran into the $100,000 range," said Kohmescher. "Every year our costs have been 10 percent to 20 percent lower than they might have been because we self-insure."

A Trend in the Market

The ranks of small employers that self-fund their health benefits are certainly growing. In 2010, 16 percent of employees who work for firms with 3 to 199 employees were covered by self-funded health plans. That's up 60 percent from 2004, when only 10 percent of employees in small firms were covered by self-funded plans.1 Larger employers are increasingly turning to self-funding as well, but the practice has been commonplace in that end of the market for some time. Today, 93 percent of employees working for firms with more than 5,000 employees are in self-funded plans.2

Most self-insured companies purchase reinsurance to protect against unexpectedly high claims. Reinsurance comes in two different forms. A company can buy a per-employee stop–loss policy, which limits the amount the company might have to pay for any given employee at, say, $30,000 per year. Firms can also purchase an overall stop–loss policy, which caps their overall financial risk at a certain level.

Self-Funding Highlights

Risk: The employer acts as its own insurer and ultimately bears the risk for all claims incurred.

Reinsurance: Employers that self-fund can purchase a reinsurance policy that caps their liability per year or per individual. Claims over a set amount are paid by the reinsurer.

Plan Administration: Self-funded employers contract with area health plans or a third-party administrator to manage health benefits for their employees and their families.

Flexibility: Self-funded plans are not subject to many state or federal regulations guiding plan design; hence, there is substantial flexibility in designing benefits to meet employee or employer needs. 

Curtis Donely, a benefits consultant based in Indianapolis who specializes in the small employer end of the market, says he's seen an uptick in interest among smaller firms looking to self-insure. Not all of them are a good fit. "I tend to discourage firms that have fewer than 35 employees," he says. "Below that point it gets hard to find reinsurers interested in their business."

For firms with between 35 and 100 employees, Donely proposes a straightforward means test. "I look at whether they are committed to self-insuring or if they are just looking for a quick way to lower costs. Do they have strong cash flow? What does their claims history look like? Are they willing to stay engaged enough to make self-insuring work?"

Staying engaged is a big deal. According to Donely, a self-insured employer must be able to take an active role in designing the company's benefits and managing vendors. "The biggest advantage of self-funding isn't costs, it's that you get control of your benefit plan. You can tweak it and make it work for you," he says. "But the flip side is that your vendors don't have any skin in the game. So you can't just defer to them to manage costs or ensure that your employees get quality care. That becomes your job or your broker's job."

Kohmescher takes that part of his job seriously. In the past six years, the practice has tweaked its benefit plan five times in various ways. It has also dumped vendors that didn't perform and required those they work with to provide regular reports on various measures of use, cost, and performance.

When a firm opts to self-fund, it is essentially deciding to act as its own insurer. It still contracts with area health plans or a third-party administrator to do things like manage physician networks, contract with providers, handle negotiations, and process claims, but the money to pay those claims comes out of a dedicated fund or the company till.

Even with reinsurance, in a bad year, paying claims out of the company's operating cash can be painful. "We plan ahead and allocate a set amount each month to pay for expected claims, but expected claims and actual claims don't always match," says Kohmescher. "In a bad month or a bad year, the overage comes out of your pocket. You make up the difference and then wait for the reinsurance check to arrive. You have to be prepared to float a significant amount of money to self-insure."

Smaller firms that self-insure also face the threat that after a bad year, or perhaps several bad years, their reinsurer might decide not to renew their policy. No law prevents a reinsurer from dropping a customer, and all but the largest of firms need stop–loss insurance to guard against financial ruin. Kohmescher acknowledges the concern, but gives high marks to the two reinsurers he's worked with. "Even after a very bad year," he says, "we sat down and had a reasonable, fair conversation about current versus future costs and our premiums. We still felt like they wanted our business."

The increase in self-funding among small employers is primarily a reaction to cost pressures. The Kaiser Family Foundation found that in 1999, small firms paid about 10 percent more than large firms for skimpier benefits. By 2009, the difference had grown to 18 percent.3 Industry-wide, between 1999 and 2009 health care premiums have increased 120 percent.

Though cost may be driving the trend toward self-funding health benefits, experts say that the flexibility it affords an employer to design a benefit plan that suits its employees may be the most valuable benefit.

 Good Candidates for Self-Funding Will Have:

  • a good track record of low-to-normal annual medical claims;
  • strong cash flow;
  • more than 35 workers; and
  • a strong interest in actively managing their own health benefits or a consultant who can help do so.
Attorney George Pantos, a leading champion of the self-funding movement, says that flexibility and cost savings can be related. "You can design a plan that is exactly the same across state lines; you can tweak your benefits to help recruit or retain workers; and you're free from various state mandates that apply to insurance companies. All these things can save money," he says. He also notes that because self-funded plans aren't subject to state and federal premium taxes, there's often an "off-the-top" savings, which varies by state, of about 2 percent.

Even though they aren't subject to the same state and federal regulations, self-funded plans tend to offer similar benefits compared to their fully insured counterparts. According to a recent RAND analysis, the actuarial value of benefits offered by small and mid-sized self-insured employers was marginally higher (by about 1%) than the value of the benefits offered by comparable fully insured firms.4 Among self-insured large employers, researchers found the opposite: they were 1.7 percent less generous than benefits offered by fully insured firms.

The Affordable Care Act may also be driving interest in self-insured plans. The Act includes a number of exemptions for self-funding that may make it financially attractive to small firms. These include allowing self-insured plans to opt out of a risk-adjustment system that will help set premiums, and excusing self-insured plans from meeting strict medical loss ratio requirements designed to limit insurer earnings.

An issue brief by the National Health Policy Forum concluded that, "in 2014 and beyond, smaller employers with relatively healthy workers…may find it financially advantageous to pay for their own firm's risk [rather] than to purchase a plan through the exchanges." 5

That remains to be seen, but in the interim, expect more and more firms to give self-funding a serious look.


1 The Kaiser Family Foundation and Health Research and Educational Trust, Employer Health Benefits, 2010 Annual Survey, (Menlo Park, Calif.: KFF and HRET, 2010).
2 Ibid.
3 S. R. Collins, K. Davis, J. L. Nicholson, and K. Stremikis, Realizing Health Reform's Potential: Small Businesses and the Affordable Care Act of 2010, (New York: The Commonwealth Fund, Sept. 2010).
4 C. Eibner, F. Girosi, A. Miller et al., Employer Self-Insurance Decisions and the Implications of the Patient Protection and Affordable Care Act as Modified by the Health Care and Education Reconciliation Act of 2010, (Santa Monica, Calif.: RAND Corp., 2011).
5 K. Linehan, Self-Insurance and the Potential Effects of Health Reform on the Small-Group Market, (Washington, D.C.: National Health Policy Forum, Dec. 2010).

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What do HIPAA, ADA, and GINA Say About Wellness Programs and Incentives?

By Brian Schilling

According to a recent survey, employers today devote nearly 2 percent of their overall health care dollars to corporate wellness programs.1 If recent legislative action is any guide, the federal government would like to see that figure increase. The Patient Protection and Affordable Care Act of 2010 included numerous provisions—dedicated funding, tax breaks, etc.—to promote wellness initiatives. In 2014, the Affordable Care Act also increases the maximum allowable incentives employers can offer workers to get them to participate in wellness programs.2 Employers have taken note: mid- to large-sized firms now offer, on average, 21 different health promotion programs. Nearly 60 percent offer cash incentives to participate.3

But that's only half the picture. Experts say that a lack of clarity around the applicability of three different federal acts designed to protect consumers against discrimination—the Health Insurance Portability and Accountability Act (HIPAA) of 1996, the Genetic Information Nondiscrimination Act (GINA) of 2008, and the Americans with Disabilities Act (ADA) of 1990—may represent an unintended barrier to investment and innovation in the field of corporate wellness.

"There's a pretty big disconnect between the government's efforts to promote wellness and the regulatory haze in which wellness programs currently operate," said Gretchen Young, senior vice president of health policy for the ERISA (Employee Retirement Income Security Act) Industry Committee, a nonprofit association that works to advance interests of the retirement, health, and compensation plans of large employers. "It's probably keeping a lot of firms on the sidelines with respect to expanding or investing in wellness programs."

Kirk Nahra, a partner at the law firm of Wiley, Rein, and Fielding and specialist in health care law, shares that sentiment and notes that expanding the allowable wellness program incentive limit (from 20% of premiums to 30% in 2014) may not have the desired effect unless the rules around incentives are clarified.

"The tension between the desire for wellness programs that really work and the restrictions on what those programs can do is problematic," said Nahra. "Confusion is an obstacle to these programs being as effective as possible."

Below is a brief summary of issues, challenges, and unanswered questions.

Among the many goals of HIPAA, a central aim was to prohibit employers from discriminating against employees on the basis of adverse health factors. To that end, HIPAA makes it illegal for health plans and other vendors to send personally identifiable health care information to employers. HIPAA also set the current incentive cap at 20 percent of premiums, a limit that was designed to ensure that incentives did not become so large that they would effectively deny coverage or unfairly penalize individuals who could not satisfy a particular wellness program standard. For instance, a $5,000 incentive given to employees who achieve a specified wellness-related goal might be construed as a penalty by individuals who could not achieve that goal or an alternative standard.

It is unclear as whether the increased incentive cap (as of 2014) will be available to grandfathered plans that were in place when the PPACA was passed and are excused from complying with several aspects of the new law. It is also unclear whether a grandfathered plan will lose its status as such if it chooses to institute an incentive larger than 20 percent.

Young doesn't know whether these aspects of the law will be ironed out any time soon, but does say, "This is really a common sense issue. I don't think the point of the Affordable Care Act was to restrict access to a really valuable benefits tool to plans created after 2010."

The landmark Americans with Disabilities Act prohibits discrimination against disabled individuals in any aspect of employment. The Act essentially bars most employers from requiring medical examinations or gathering medical information about current or prospective employees, but does allow employers to offer voluntary medical examinations or request voluntary medical histories as long as collected information is kept confidential and isn't used for discriminatory purposes. Since 2000, it has been understood that voluntary wellness programs did not violate ADA restrictions. But in 2009 the Equal Employment Opportunity Commission (EEOC), which oversees ADA compliance, warned that workplace wellness programs featuring an incentive larger than 20 percent might violate the ADA even if they fully comply with all other HIPAA requirements. That puts the EEOC at odds with Congress and the Accountable Care Act, both of which have made clear that 30 percent incentives do not prevent a wellness program from being voluntary for purposes of HIPAA.

Young notes that reconciling issues around allowable incentive levels may become even thornier if those levels go up to the 50 percent maximum allowed by the Affordable Care Act (at the discretion of the departments of Labor, Treasury, and Health and Human Services). "I don't know at what point a particular incentive level makes a wellness program mandatory instead of voluntary. Also, it's not clear whether negative incentives are allowable or if only rewards may be used," said Young. "What employers need is a clear, consistent message about what they're allowed to do."

The intent of the Genetic Information Nondiscrimination Act is to prohibit health plans from denying coverage or disparately charging individuals based on a genetic predisposition to developing certain diseases or conditions in the future. Similarly, the legislation bars employers from using genetic information when making hiring, firing, or promotion decisions. Language in the Act has been interpreted more than once by the EEOC, and the departments of Treasury, Labor, and Health and Human Services to mean that employers can't offer any financial incentive to encourage employees to voluntarily provide a family medical history as part of an initial health risk assessment, a key tool in helping employees to understand their health risks. This interpretation is plainly contradictory to findings by the Center for Medicare and Medicaid Services that show financial incentives are necessary to encourage individuals to participate in wellness activities.4

Young's group—the ERISA Industry Committee—is lobbying the federal government to rethink its interpretation of the GINA statute and issue a clarifying statement saying that voluntary programs to encourage employees to provide family medical histories do not violate GINA.
While the involved agencies don't offer any time frame for issuing further guidance on these issues, Nahra remains optimistic that wellness programs have a bright and perhaps clearer future. "There's no bad law here. ADA, GINA, and HIPAA are all good pieces of legislation. We just need to reconcile our interpretations so we can advance the common goal of promoting wellness and getting people the help they need."

1 Unnamed survey of 121 employers conducted between September 11, 2009 and October 5, 2009 by Fidelity Investments and the National Business Group on Health, For details, visit 
2 Ibid.
3 Ibid.
4 Ibid.

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Did You Know?

Employer Coverage Expands Under Reform, But Not Necessarily to Workers 
Eighteen months after passage of the national health care overhaul, American employers report an average 2 percent increase in insurance enrollments. Study authors attribute the expansion in coverage to workers taking advantage of new rules allowing them to add their adult children (up to age 26) to existing policies.

Malpractice Payouts: Just 1 in 5 Cases
Every year about 1 in 14 doctors is subject of a malpractice claim, but only about 20 percent of those claims will ever result in a payout. Study coauthor Amitabh Chandra, an economist and professor of public policy at the Harvard Kennedy School of Government noted that this shouldn’t be taken as an indication that most suits are frivolous—just a tiny fraction of patients actually harmed by medical mistakes ever file claims due to the high costs associated with doing so. 

Paperwork to the Rescue: Will Standardized Forms Make Insurance Purchasing Easier?
The Obama administration has proposed that health insurers and employers begin using simple, standardized information forms early next year to describe health plan benefits and costs in simple, easy-to-understand terms so that consumers can comparison shop for the best coverage. For instance, plans would be required to produce a standardized, four-page benefits summary and two pages of explanatory material modeled after the nutrition labels on prepared foods. The forms will show, among other things, how much a plan will pay for some common medical conditions.

Health Insurance Premiums Widely Vary from State to State
The average cost of individual coverage in Alabama is just $136 a month, but 1,300 miles away in Vermont it’s about three times that amount: about $400. Massachusetts is similarly expensive, according to the Kaiser Family Foundation report. The national average was $215. Study authors predict that the new federal health care law will reduce the variation in premiums, but not erase it entirely due to cost of living differences and other factors.

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Notable Numbers

  • 2 – Percent of health care budgets large employers in the U.S. dedicate to wellness programs1.
  • 21 – Number of wellness programs a typical large employer might offer2.
  • <5% – Typical "engagement rate" for a smoking cessation wellness programs3.
  • 2.7 – Percent of large employers polled in a May, 2011 survey that said they would seriously consider dropping health benefits in 2014, forcing employees to pursue coverage on their own through the exchanges4.
  • 18 – Percent of large employers that said they would seriously consider dropping health coverage as a benefit in 2014 in a survey conducted in June, 20115.
  • #1 – Rank employees gave health benefits when asked "what is the most important non-cash benefit you get from your employer?" 6

1 Unnamed survey of 121 employers conducted between September 11, 2009 and October 5, 2009 by Fidelity Investments and the National Business Group on Health. For details, visit 
2 Ibid.
3 McStravic; The Challenge of Participation in Disease Mangement; Disease Management, Vol 10, No 3; 2007
4 Health Care Reform: What Employers Are Considering -- Survey Results May 2011. Prepared by the International Foundation of Employee Benefit Plans; Available online at 
5 Employer Health Reform Survey Results, June 2011. Lockton Companies LLC. Available online at
6 Eibner, Hussey, and Girosi, "Effects of the Affordable Care Act," The New England Journal of Medicine; October 7, 2010.

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Editorial Advisory Board and Steering Committee

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Editorial Advisory Board and Steering Committee

Editorial Advisory Board

Lawrence Becker, Director, Strategic Partnerships, Alliances and Analytics, Corporate Human Resources, Xerox Corporation
François de Brantes, M.B.A. , Chief Executive Officer, Bridges to Excellence
Michael Chernew, Ph.D., Professor, Department of Health Care Policy, Harvard Medical School
Paul Fronstin, Ph.D., Director, Health Research & Education Program, Employee Benefit Research Institute
Cheryl Koopman, Vice President, Human Resources, Richards Industries
Laurel Pickering, M.P.H., Executive Director, New York Business Group on Health
Martin Sepulveda, M.D., Vice President for Integrated Health Services, IBM

Steering Committee

Andrew Webber, President and CEO, National Business Coalition on Health
Barry Scholl, Senior Vice President for Communications & Publishing, The Commonwealth Fund
Anthony Shih, M.D., M.P.H., Executive Vice President for Programs, The Commonwealth Fund
Sharron DiMario, Director of Community Initiatives, Employers Health Purchasing Corporation of Ohio
Carly McKeon, Director of Membership & Communications, National Business Coalition on Health
Brian Schilling, Lead Writer
Doug Ward, Web Developer, The Waters Ward Company, LLC

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