Getting Workers to Slim Down Is New Priority for Businesses

WASHINGTON -- A group of big companies worried about health-care costs has opened an institute focusing on obesity, saying overweight workers are costing employers billions of dollars a year.

"This is like smoking 30 years ago. This is a public-health problem that affects everybody," said Helen Darling, president of the Washington Business Group on Health, which is starting the new institute. It is sponsored by 13 companies, including Ford Motor Co. and Morgan Stanley, with backing from the government's Centers for Disease Control and Prevention.

The institute aims to spread the word about what works for companies trying to reduce obesity in their ranks. As a start, the institute has published a booklet describing the costs and results of some weight-management programs marketed to employers by companies such as Weight Watchers International Inc. Ms. Darling said the point isn't to endorse any particular company's program but to give information about what is available.

Company executives who spoke at a news conference in Washington said diseases related to obesity, especially diabetes, account for a growing portion of health-care costs. More than half of Americans are either overweight or obese, according to one measure that compares a person's weight to his or her height.

"Weight-related problems are our No. 1 health-care burden," said Shari Davidson, senior vice president of human resources at printing company Quebecor World Inc., one of the institute's sponsors.

A study published last month in the online edition of the journal Health Affairs says medical spending attributable to excess weight and obesity may have been as high as $78.5 billion in 1998, or $92.6 billion in 2002 dollars. The government, through its Medicare and Medicaid programs, picks up about half of that cost with private payers such as companies accounting for more than a third.

Ms. Darling and the other executives acknowledged it isn't easy for companies to make a dent in their employees' weight problems, but they said even small initiatives such as serving healthier food in the company cafeteria can make a start.

Separately, an Institute of Medicine study concluded that health problems and early deaths of people who lack medical insurance cost the U.S. economy $65 billion to $130 billion a year.

The study comes as Congress is debating adding a prescription-drug benefit to Medicare, the federal health program for the elderly and disabled, and considering revamping Medicaid, the state/federal program for the poor and disabled. Congress and others have become increasingly concerned about the plight of the 41 million Americans who are uninsured, but efforts to reduce the number have foundered on costs and disagreements about potential solutions. The Democratic presidential contenders have pledged to make the uninsured a key issue in next year's campaign.

Christine Stencel, a spokeswoman for the Institute of Medicine, said the study "places a value to things that are intangible" which gives a more accurate picture. "There's more to this than just how much society has to spend on free health care services," Ms. Stencel said.

The Institute of Medicine estimated it would cost an additional $34 billion to $69 billion a year to provide health services to the 41 million Americans who go without insurance -- a number that has risen sharply from the 38.7 million counted by the Census Bureau in 2000. The U.S. already spends $99 billion a year on the uninsured.

While societal costs of having a large portion of the population without health insurance are usually measured in terms of public medical care and programs, the study focused on the value of being healthy and productive at work. The primary costs for the uninsured, it found, are related to receiving too little care too late.

Write to Peter Landers at peter.landers@wsj.com² and Lauren Bayne Anderson at lauren.anderson@wsj.com³

Updated June 18, 2003

As Health Costs Increase, Workers Must Pay More

Audrey Simms can't afford to get all three of her prescriptions filled each month. So she alternates, sometimes skipping her thyroid medication, at other times forgoing her acid-reflux pills or her hormone treatment.

It's a familiar story for the millions of Americans who lack a prescription-drug benefit. But Ms. Simms, 46 years old, does have that benefit through her Missouri government job. She simply can no longer afford the copayments.

Drugs that used to require copays of $5 and $10 just a few years ago are now costing her as much as $40 each in copays. Ms. Simms, who takes home about $1,230 a month, would have to spend more than $100 for her three prescriptions each month.

"So I decide between the medicine and the food," says Ms. Simms, who works with the mentally ill in St. Louis. "And I have a 12-year-old daughter to feed."

After years of generous health-insurance benefits, American workers increasingly are paying much more for their health-care. Though the consumer price index is beginning to show a slowing in the rate of price increases, overall spending on health care by employers continues to climb as aging Americans use more medical services. Employers, saying they can no longer afford the 12% to 15% annual increases in the cost of providing health benefits, are raising workers' copays, deductibles and monthly premiums.

According to the Bureau of Labor Statistics, Americans' average annual out-of-pocket expenses for health care rose 26% between 1995 and 2001, to $2,182. The Kaiser Family Foundation, a nonpartisan research group based in Menlo Park, Calif., that tracks health-care spending, says that workers' average monthly contribution to premiums for family coverage alone more than tripled to $174 from $52 between 1988 and 2002. Copays for brand-name drugs that have generic equivalents jumped 62% to $26 last year from $16 in 2000, while generics rose to an average of $9 from $8, Kaiser says.

Health plans and employers are also instituting copays for services that never required one. Ms. Simms's employer, the state of Missouri, this year added a $200 copay in some plans for hospital admissions.

The big shift of health-care costs from employers to employees comes at a bad time. Many workers who manage to keep their jobs in the wobbly economy already face wage freezes and wage cuts. An increase in a worker's health-care costs amounts to a pay cut.

But the weak economy also makes it hard for employers to buck the trend. The average total cost to employers of health-care benefits for current employees rose 14.7% in 2002, at a time when general inflation was just 2%, according to New York-based Mercer Human Resource Consulting, which helps employers pick benefits. Since 1997, health-benefit costs per employee have risen 57%. Driving the rise: aging Baby Boomers and increased use of physician services, expensive prescription drugs and diagnostic testing tools, such as MRIs.

The trend is so broadly felt that health-care cost-shifting lies at the heart of many major labor disputes, even prompting strikes recently at places such as General Electric Co., Lockheed Martin Corp. and Hershey Foods Corp.

"We have over 1,000 contracts being negotiated by this union," says Steve Sleigh, director of strategic resources at the International Association of Machinists, which struck Lockheed in April over cost-shifting. "And in every single one, this has become the lightning rod."

The Lockheed union workers were able to force the company back somewhat on the increased cost-shifting. Lockheed wanted to raise prescription-drug copays to as high as 40% of a drug's price, up from the current $5 and $10. Instead, workers will pay $40 on the high end.

Dow Jones & Co., which publishes this newspaper, is currently negotiating with the union that represents the Journal's newsroom staff, among other employees, over the company's proposed changes to its health-care plan. These proposed changes include increasing copays and deductibles, and requiring employees to pay monthly premiums.

American companies began helping workers with basic health care in the 1960s. It was good for morale, fostered loyalty, boosted productivity and burnished the corporate image. Richard Quinn, 59, is director of compensation and benefits at Public Service Enterprise Group, an energy holding company headquartered in Newark, N.J., and has been with the company more than 40 years. He remembers when companies paid only for major events, such as surgery or other hospital costs. Employees generally paid their full doctor and prescription-drug bills.

What employers considered a useful perquisite, employees came to regard as an entitlement. And while employers nervously watched health-benefit costs climb, workers saw their contributions barely changing.

Employers say they needed to close that gap in perception, to show their employees the true cost of health care and correct the mistaken idea that a doctor's visit is only $10 or that drug prices haven't risen as substantially as other goods.

"The same person who will spend three or four dollars a day on cigarettes will yell and scream if their copayment is raised from $5 to $15," says Mr. Quinn.

The move toward higher copays began in the late 1990s, at a time when prescription-drug costs were escalating by more than 14% a year. To make patients more aware of the high cost of their medicines, health plans began tinkering with higher copays and, later, tiered copays that allow patients to pay lower amounts of perhaps $10 for generics, $20 for branded drugs on the health plan's preferred list, and $40 for nonpreferred drugs.

In recent years, health plans have become even more aggressive in raising these copays to force patients to share more of their medical costs and to pick cheaper drugs. Ironically the drug industry itself helped create a climate where patients could make more of their own choices of medicine -- with a blitz of ads taking their pitches directly to consumers.

In a study conducted at the end of last year by the Washington Business Group on Health, which represents nearly 200 major employers from across the country, 80% of the employers said they planned to increase copays or cost sharing in 2003, compared with 65% who answered that way in 2001. In a more recent study, the group found that 57% of employers plan to increase cost sharing for 2004. "That's probably that low because so many increased it in 2003," says Helen Darling, the group's president.

Public Service Enterprise recently raised doctor-office copays for its workers to $15 after keeping them at $5 for a decade. The company is still paying the bulk of the typical $80 doctor's fee.

"I rarely have people say that they can't afford it," Mr. Quinn says. "It's more that they don't see it as their obligation."

One woman warned Mr. Quinn that "she would hold me personally responsible" if her children got sick because the plan does not pay for a $60 Lyme-disease vaccine that she wasn't willing to pay for herself. "I didn't know what to say," says Mr. Quinn. "It was like concern for the children's health didn't include spending any of her own money on such an expense. I'm sure that wasn't the case, but it sounded like that."

Today, health-care costs rank among Americans' top concerns, according to a recent survey by the Kaiser Family Foundation. The study found that 36% of Americans said they were very worried that the amount they pay for health-care services or health insurance will increase. That was more than twice the proportion of people who were very worried about not being able to pay their rent or mortgage, losing money in the stock market, being a victim of a terrorist attack or losing their job.

Ron Meyer, executive director of the Missouri state employees' health plan, is looking at a health-care bill for 113,000 people that has nearly tripled to $260 million this year from $90 million in 1996. People such as Ms. Simms "have some very difficult situations to deal with," he acknowledges. Recently, the state raised doctor-visit copays to $30 from $20.

"Let's face it, a $30 copayment for a doctor's visit, that's getting up there," he says.

But Missouri, operating under budget pressures like many other states, has only so much money that it can spend on employee costs. When it came time to figure out what to do about this year's health benefits, Mr. Meyer says it weighed on him that state employees "have not gotten a pay raise for two years, and this will probably be the third. ... For all practical purposes, you're getting a pay cut."

With the help of a PricewaterhouseCoopers consultant, Sandi Hunt, Mr. Meyer says, "we canvassed a lot of other states to make sure we weren't missing something" that would explain why the increases in Missouri's health-care costs were so dramatic and how they could be brought down.

But there weren't any answers in other states. And there was no relief in shopping around to different insurance carriers in the hope that competition would drive down costs. All health insurers are basically offering the same big price increases.

"It's not as if [Missouri] or any other employer is in a position to say we can change the cost," says Missouri's consultant, Ms. Hunt. "They're not providing health care, they're paying for it."

So Ms. Hunt suggested two plan choices to Missouri to try to soften the rising cost for employees: one plan with a higher monthly premium but lower copays, and another plan with a lower monthly premium but higher copays. The expectation is that relatively healthy employees who don't see a lot of doctors or need a lot of medications will pick the low-premium plan, while others who do use a lot of health-care services might pick the higher-premium plan to take advantage of the lower copays.

A lot of employees switched to the plan with the lower monthly premium, Mr. Meyer says, to save on their monthly costs. But even though she uses a lot of health-care services and medications, Ms. Simms chose the low-premium, high-copay plan to save on her monthly bills.

She now pays $61 a month, instead of the $123 she paid last year. But her daughter has sickle-cell anemia, landing her in the hospital several times a year, where Ms. Simms now has to cough up a $200 hospital copayment for each admission, capped at $800 for the year.

No matter what Mr. Meyer could do to mitigate some pain, both plans had to reflect an increase in cost sharing from employees. For Missouri government employees in Ms. Simms's salary bracket -- less than $20,000 a year -- the typical family-coverage premium eats up about 20% of their salary.

Though many Americans can afford the premium and copayment increases without serious hardship, there are wide segments of society that are hit hard, such as low-income workers and the elderly. The more than 4.5 million seniors who are in Medicare managed-care plans have seen huge increases in their costs in recent years (see related article¹).

About 35% of those seniors now pay a monthly premium of $50 or more, up from only 3.2% of the seniors who paid that much in 1999, according to a survey by the Commonwealth Fund, a research group. Many of those Medicare managed-care plans offer a drug benefit, which is one reason seniors flocked to the plans in the 1990s. However, in 2003, 53% of the seniors in these plans had an annual drug cap of $500 or less, compared with only 11% of seniors with such restrictions in 1999, the Commonwealth Fund found. The fund also found that 82% of the seniors in these plans now make a copayment for hospital admission, compared with only 4.3% in 1999.

In the long run, rising copayments, premiums and deductibles could have a lasting negative effect on U.S. health-care costs. If people like Ms. Simms don't fill medications, they are likely to become sicker and require more expensive care in the future. A yet-to-be-published Rand study of 90,000 people with chronic diseases such as diabetes and hypertension found that a doubling of copays for prescription drugs results in a 10% to 12% reduction in use of medications for these conditions. Merck & Co., the pharmaceutical giant based in Whitehouse Station, N.J., helped fund that study.

Merck's Medco Health Solutions Inc., which provides pharmacy benefits to more than 60 million Americans, found in a separate study that when the proportion of costs that consumers must share rises by 10 percentage points or more, the use of essential pharmaceuticals, such as those for diabetes and heart disease, declines.

Write to Barbara Martinez at barbara.martinez@wsj.com⁴

Updated June 16, 2003

Fast-Growing Health Plan Has A Catch: $1,000-a-Year Cap

For legions of Americans with no health insurance, a policy known as "limited benefit" sounds like an appealing choice. Premiums are often only about $10 a week. But there's a big catch: For basic medical care, it often pays only $1,000 a year -- so little that some question whether it amounts to health insurance at all.

The policies are among the fastest-growing health-insurance offerings in the workplace. Sold by half a dozen insurance companies, they cover an estimated 750,000 employees and family members. Wal-Mart Stores Inc., McDonald's Corp. and Lowe's Cos. are among major companies making them available to their employees.

Yoshiko Craig, a receptionist in Duluth, Ga., bought such coverage in April 1998. She used most of a 50-cent raise she had just gotten, to $7.75 an hour, to buy the plan through her employer, the big Regis Corp. hair-salon chain. It cost $16 a week and capped her basic benefits at $1,000 a year, although, as with most such plans, it let her collect a few thousand dollars more if injured in an accident or hospitalized. Age 61 at the time, Mrs. Craig remembers thinking that she didn't expect to become seriously ill.

Five months later, she learned she had breast cancer. Following surgery and chemotherapy, Mrs. Craig found herself facing medical bills of $85,000. Ever since, she and her husband have been paying about $10,000 a year toward their medical debt.

"The insurance wasn't any help," Mrs. Craig says.

Some health-care advocates and industry executives are highly skeptical of plans such as hers. At one insurance-company meeting last year, a roomful of agents burst into laughter when an executive described a limited-benefit plan. "I see no value in a $1,000 policy," says John Hartnedy, Arkansas' deputy insurance commissioner, who says what people really need is coverage for major illnesses.

The plans spotlight the growing disparity at many companies between the treatment of higher-ranking employees -- who generally get comprehensive health-insurance policies -- and hourly workers, who tend to be the lowest-paid and least able to cope with medical costs.

Supporters of the limited-benefit plans say their critics don't take into account economic realities facing the working poor. "It's easy for someone to say it's a nothing program when they have money in the bank, credit cards in their wallet and nice health insurance," says Charles Shoumaker, a former human-resources manager who helped launch the limited plans more than a decade ago. "They don't realize that $1,000 is a lot of money to the working poor."

Adolfo Gutierrez, an hourly employee at an Austin, Texas, restaurant in the Schlotzsky's Deli chain, found value in his $1,000-limit plan. It saved him a couple of hundred dollars when he sprained his hand playing basketball last year and had to go to an emergency room for a splint. This week, he got treatment for a rash on his hands and didn't pay anything at the doctor's office. "Having health insurance is wonderful," says Mr. Gutierrez, 22, whose employer, unlike most, paid the premium.

Defenders say the simple act of giving low-income workers an insurance card can encourage them to seek routine preventive care. They contend that some measure of health coverage, however small, is better than none.

Cost Conscious

Some employers also say this is all they can afford, with the economy in low gear and health-care expenses soaring. The cost to employers of providing comprehensive health benefits has risen 57% in five years, to $5,646 per employee, according to Mercer Human Resource Consulting.

By offering limited-benefit plans, meanwhile, employers are able to tell new low-level workers that health insurance is available through the job, even though most employers pay nothing toward it.

Think of it as getting insurance for the price of a movie or a few beers, some employers and insurance agents tell workers.

Enrollment in the limited-benefit health plans has grown about 20% in each of the past two years. Insurers sell them solely through employers. The employers make them available chiefly to hourly workers, either full- or part-time, and collect the premiums by payroll deduction. The companies, many in the service sector, typically find that 10% to 30% of eligible workers purchase the coverage.

An employee-benefits administrator dreamed up the plans in 1986. The initial idea was that the plans might help businesses retain certain categories of workers, such as veterans and minorities, that entitled the employers to a tax credit. The benefits firm, Strategic Resource Co. in Columbia, S.C., lined up an underwriter and later began marketing the plans widely.

A couple of years later, Mr. Shoumaker developed his own version, while he was human-resources manager for Circle K convenience stores. He started a firm to market it, Star Human Resources Group Inc. He found corporate executives dubious of a $1,000 health policy. "Many felt embarrassed to take anything that low," he says.

They grew more comfortable after Star signed up McDonald's in 1994, and then retailer Target Corp. a year later. McDonald's says about 12,500 of 250,000 hourly employees at its corporate-owned and franchised restaurants are enrolled in limited-benefit insurance. The chain offers those hourly employees more-comprehensive health insurance but at a higher price.

SLIM OPTIONS   Some features of one of the limited-benefit health plans offered at Regis Corp., through UICI.   • Basic annual benefit: $1,000*   • Weekly premium for an individual: $6.92   • Weekly premium for a family: $21.55   • Basic deductible: $50   • Doctor visits: $15 copay   • Accident benefit: $5,000, up to two a year, insurer pays 80% of covered expenses   • Accidental-death benefit: $10,000     *Per insured person   Source: Regis

Employers readily concede the plans offer scant help with a serious illness. The average cost of a hospital stay in 2001 was $13,685, according to Mutual of Omaha Insurance Co. study. Employers and insurance agents say they make sure workers understand what the insurance can and can't do.

"The concern is they understand it is a limited benefit, so we don't have someone enrolled in the plan who has open-heart surgery and thinks they have coverage for $100,000," says Bob Ihrie, a vice president at Lowe's. The home-improvement retailer offers part-time employees a choice of two Allstate Corp. plans with maximum annual benefits of $2,500 or $5,000. To avoid confusion with broader, largely company-paid insurance for full-time employees, the company schedules enrollment on its limited-benefit plans at a different time of the year. Some employers require insurance agents to come to their premises and explain the plans to potential buyers.

Some insurance companies have tried offering low-cost policies that cover "catastrophic" health costs. But industry officials say low-income employees haven't shown much interest because such plans require high deductibles -- perhaps a couple of thousand dollars -- before coverage kicks in. Low-wage workers are more interested in something that covers basic expenses, insurers say.

'Adverse Selection'

Another problem insurers cite in trying to offer a low-cost plan with potentially large payouts is "adverse selection": Disproportionate purchasing by people whose health is poor, and who are likely to use a lot of the benefits. With employer-sponsored plans, health insurers cannot reject applicants on the basis of their health.

Mrs. Craig, the hair-salon receptionist in Georgia, recovered from the cancer that struck soon after she bought a limited-benefit plan. But the bills were daunting. Indeed, a serious medical problem such as hers is a factor behind about half of the nation's 1.5 million bankruptcy filings, according to Harvard researchers who study the issue. Mrs. Craig rejected the bankruptcy route. The doctors "saved my life" and deserve to be paid, says Mrs. Craig, now 66.

She and her husband, William, a 69-year-old retired farm-equipment salesman, paid a deposit to each medical provider and began sending monthly checks. They've whittled their balance to $28,000.

Although a limited plan was of scant value to Mrs. Craig, it can be a big help for an employer, with few costs. Even the expense of enrollment is largely borne by insurance companies or their agents.

"We wanted to do something that would attract and retain people and give them the ability to have some insurance," says Jan Cohen, managing director of benefits at Budget Rent A Car System, a unit of Cendant Corp. About a hundred of Budget's 1,800 part-time employees purchased a limited policy.

The early architects of the plans figured that price would be key for lower-income workers, so they set weekly premiums at equal to just one to two hours' wages. Those premiums, in turn, dictated low levels of benefits: from $1,000 to a few thousand dollars per year for basics such as emergency-room care and doctor visits.

Some in the insurance industry have a hard time taking this coverage seriously. A gathering of 300 insurance agents in Las Vegas erupted into laughter last summer when an insurance-company executive explained a limited-benefit plan offered by Star Human Resources. "The annual cap is $1,000. That's not the deductible," said Gregory Mutz, CEO of Dallas insurer UICI, which had just acquired Star from Mr. Shoumaker.

Mr. Mutz told the agents not to laugh. Economically, the potential customers "are at the bottom of the food chain," he said. "I don't want to make fun" of this coverage.

Allstate, Safeco Corp. and CNA Financial Corp. have also thrown their formidable brand names behind limited-benefit plans. At CNA, which underwrites Strategic Resources' plans and has just begun offering one of its own, "This is an area we would like to grow aggressively," says a vice president, Douglas Hayes.

Restrictions Apply

One of the selling points to employees is that the plans will cover their everyday medical expenses. Still, the policies have restrictions such as waiting periods for "wellness checks" and for treatment of pre-existing conditions. They also involve deductibles that policyholders must pay each year before benefits kick in.

Mrs. Craig's plan imposed a $150 annual deductible, and it required $10 copayments for doctor visits. Besides the $1,000 basic annual benefit, she could collect a $500-a-day reimbursement for up to five days of hospitalization a year. The policy also offered up to $2,000 a year for surgery and $5,000 for an accident, up to two of them a year. She paid an extra $3 a week to get some dental and vision coverage.

"The plan is a rip-off," says Beth Todd, a 28-year-old who enrolled in a limited-benefit plan at another Regis hair salon, in Asheville, N.C., in 1999. She says she canceled the policy after less than a year because it paid so little toward her treatment for a sinus infection and migraines.

Regis's chief financial officer, Randy Pearce, says limited-benefit plans don't fit every worker's needs. "But I think people vote with their wallet," he says, "and we have more than 7,000 employees enrolled," or about 20% of its U.S. work force.

Some smaller companies are beginning to drop comprehensive health insurance in favor of these scaled-down, employee-paid plans. Duane Zuber, part-owner of a Comfort Inn in Grand Rapids, Mich., says he did so when the state's Blue Cross Blue Shield carrier raised his health-insurance premiums on five employees and their families by 24% -- in a year when his revenue was down 7%. To contain his health-insurance cost, Mr. Zuber ended comprehensive coverage for two employees and offered them a limited-benefit plan.

Mariah Tompkins, a clerk earning $8.25 an hour, was one of the two. Now the 20-year-old spends $9.95 a week on a limited-benefit plan, which will pay $50 per visit for up to five emergency-room or doctor visits a year, plus extra amounts for hospitalization or car accidents. "It's kind of annoying I have less now," Ms. Tompkins says. "I would like to have good insurance."

Write to Chad Terhune at chad.terhune@wsj.com¹

Updated May 14, 2003 8:21 a.m.