Imagine being a benefits manager for a large corporation boasting three straight years of flat medical and absence costs in 2005, 2006 and 2007 (1). Like many benefits managers, you might be proud and vocal about the many programs you’ve purchased to encourage health and disease management. We have all seen such flat trends attributed to health interventions provided by employers. This example was no different.
Did everyone suddenly become ill in the fall of 2007? Suddenly, chronic diseases and injuries just appeared?
To confirm, detailed analysis of health claims shows that virtually every category of illness became more prevalent and more expensive. So, if you believe the only driver of medical costs is the number and severity of medical conditions, you have to conclude that poor health made things worse. But if so, what happened to all of the programs (which were still in place, by the way) we credited for the three-year flat trend?
Of course there are other reasons…
More frequent and more expensive medical claims do not prove more disease or increased severity. This is about more care-seeking, not more health problems. It will not surprise most readers to learn that several non-health-related events happened at this company right at the point where the cost trend changed: business revenues started to fall in mid 2007, which brought about a hiring freeze and some lay-offs. Bonuses fell, salaries did not rise as quickly as before, and the company announced a restructuring process.
No, people did not all-of-a-sudden have new diseases, but there were definite changes in their reasons for using benefits. When business events make work more tenuous and stressful, we often see workers:
- Getting discretionary procedures done before possibly losing health insurance;
- Using time off to go job hunting;
- Having less enthusiasm for attending work in general;
- Spending down any unused Flex Spending and Health Reimbursement funds;
- Seeking additional medical services for stress-related symptoms; and
- Drastically increasing benefit use prior to termination.
All of these factors, and perhaps others, probably contributed to the significant cost increase in this case. And, while it is certainly true that increased stress at work is likely to cause workers to feel lousy, that is different than developing new chronic illnesses or injuries.
Why do we cling to the ‘health only’ explanation?
Although it surprises me, many presenters at corporate health conferences still perpetuate the idea that health benefits expenditures are purely a function of disease. They insist that if a company’s expenditures are high, it is completely due to a sicker workforce (that needs more intervention). And similarly, they insist that a lower-than-expected trend is a reflection of better health. That is only one factor. As we see here, that explanation can backfire when more complete information is available.
In tough economic times, it is even more important to align incentives with business success. Never forget that incentives matter; meaning that if employees can get value only from USING benefits, this problem will only further amplify when business is down. Higher deductibles, the presence of health savings accounts, cash-back for unused time off, lower pay during short-term disability and higher bonuses all give employees reasons to stay healthy and minimize costs no matter what the economic climate. These incentives counteract the natural tendency to use-before-you-lose, and they position judicious consumption in everyone’s best interest. The current recession has strained nearly every company in the U.S. The trend shown in these graphs is not unusual; but the more misaligned a company’s incentives, the greater the predictable increase in benefits consumption.
Think of it this way: when employment becomes less certain, future benefits are threatened, and there is no inherent value in NOT using benefits—people will naturally respond in their own best interest with higher consumption. So, have you checked your trend lately? Maybe it’s time to realign.
Why this matters: Health-benefit costs reflect more than health. Given the economic climate, there has never been a better time to check incentive alignment. If they have something to gain, employees will be better stewards of the resources at their disposal.
1. Although this is a real trend, we altered the actual values a little bit to protect the company’s identity. Several companies we work with have had similar experiences during the recent economic downturn, so think of it as a composite of multiple organizations.