Author: Jeremy Smerd

Chennai, India—Sandy Jones left a voice message and a Silicon Valley telephone number for the potential job candidate. Moments later, when a phone rang inside a small office in Chennai, India, Naranjana Iyengar answered it.

“Yes, I did call you regarding a code analyst at Cisco Systems,” says Iyengar, who is “Sandy Jones” when calling the U.S. to fill job openings for American employers. “Would contract positions work for you?”

Iyengar, 24, has used an American name since she started working as a telemarketer at a call center several years ago. Today she works for recruitment process outsourcing company Summit HR Worldwide, earning a commission every time she fills a job for her clients in the United States.

Companies looking for talent, from low-level hourly workers to executives, have long relied on headhunters and staffing companies to meet their staffing needs, usually paying them a fee for every position they fill. Now, like most every other industry, recruiting has found its way offshore. Because filling temporary, hourly jobs is a low-margin business, some recruiters, like Summit HR, have turned to the Indian workforce to increase their profits.

Summit HR, founded in 2000 and based in Los Altos, California, has 200 employees and offices in the Indian cities of Chennai, Bangalore and Pune. It recruits both American and Indian workforces, and its client list features Cisco, Intel, Dell, and AT&T as well as staffing companies that want to take on large accounts but find little business value in recruiting for low-level jobs. Recruiters in its two offices in Chennai, an industrial city on the country’s southeastern coast formerly known as Madras, are focused on recruiting American employees.

According to technology consulting firm Gartner, the estimated market size of the recruitment process outsourcing industry worldwide is expected to total $1.4 billion in 2007 and will to grow to $2 billion by 2010.

But despite the world’s embrace of India as a business process outsourcing hub, recruitment outsourcing has not been adopted by companies with equal enthusiasm, says Robert Brown, vice president for research at Gartner. Employers worry that recruiters will not have the necessary skills to competently identify appropriate candidates, he says.

“There’s a real reluctance to heavily embrace the offshore model as it pertains to HR recruitment,” Brown says.

At least one staffing company, Spherion Corp., experimented with this outsourcing model. Unhappy with the quality of work it outsourced to Indian recruiters, the company decided to bring that function back onshore, says Brown, who was briefed by Spherion executives on the situation. Spherion declined repeated requests for comment for this story.

Summit COO Sarada Srinivas says companies hesitate to offshore recruiting because it’s a difficult skill to master. With fewer processes that can be standardized, recruiters must have sophisticated language and decision-making skills to sift through thousands of résumés, match a candidate to the right job opening, interview potential employees and send the best ones to onshore recruiters, who then conduct face-to-face interviews.

“What’s really hard to do is separate the wheat from the chaff,” Srinivas says of potential candidates. Summit HR executives say their recruiters work at a much higher skill level than most BPOs.

“There’s only so much you can script,” Srinivas says of her recruiters’ calls. “The actual interview requires a bit of judgment and what you call the human touch.”

Inside Summit’s office in Chennai, 12 young workers, most of them women, sit in front of computers at small cubicles supplied with phones and a map of the United States. Most are recruiting for entry-level and middle-management jobs.

Women compose approximately 35 percent of the IT industry’s workforce in India, according to the Indian IT industry group Nasscom. In its 2005 survey of women in the workplace, women said they feel they have achieved parity with men because they have been in the workforce since the BPO industry began. Women, according to the survey, “are intrinsically suited” to work in the industry because they are good communicators. Women said flexible work hours allowed them to “juggle career aspirations and home.”

Recruiters identify themselves by their assumed names, saying they work for a Los Altos, California-based company. Then they leave the company’s Silicon Valley phone number with its 408 area code. Only if people ask do they reveal that the number they’ve dialed connects them to India.

Some recruiters search job boards like Monster. Others sit before Excel spreadsheets plotting their next cold call.

It’s just after midnight in India when Mrudubhashini Chandrashekar, a 24-year-old recruiter, gets Dominique Rodriguez, a construction worker from Redwood City, California, on the line. “Are you looking for any job openings?” Chandrashekar says. “That’s perfect, Dominique. Actually, I got your résumé from Monster and we are tying to fill a position in Stanford Linear Accelerator Center.”

Things seem to be going well. Rodriquez is clearly interested in the construction job at the physics research laboratory at Stanford University. Then Rodriquez’s cell phone signal fades. A bit of a panic sets in.

“Hello? Hello? Yes, Dominique, I’m sorry. The voice was breaking up,” Chandrashekar says. “Hello? I’m sorry Dominique your woice”—and here she fails to pronounce the “v” in “voice” as she had earlier pronounced it in “valley”—”is breaking up. Would you like me to call back again? Do you have my number? OK. I’ll be waiting for your call.”

Correct pronunciation, like an Americanized name, is meant to put the candidate at ease rather than fool them into thinking they’re speaking with an American, recruiters say. Most people are not upset to learn that they’ve received a call from India. Proper accents, though, can establish trust and rapport with candidates, which is what’s needed to keep them on the phone and engaged, recruiters say. Identifying potential hires takes longer than a 60-second call. Perseverance is a quality successful recruiters possess.

“They have to keep it up to see results,” says Ausha Anandakumar, who runs Summit’s training and employee development programs. “At the other BPOs you get results right away. You just have to make 350 calls and you get a pat on the back.”

Most of the recruiters are hired from the BPO industry, Anandakumar says, where they have experience talking to customers on the phone. Before working at Summit, Iyengar made several hundred calls a day as a telemarketer selling Visa cards. Her target audience was people with low incomes and credit scores.

“We had a lot of strategies to sell those credit cards, saying there was no annual fee and all that,” she says.

The job was hard and monotonous, but it exposed Iyengar to the rich vernacular of American profanity.

“They used all the bad words,” she says. “We would just say, ‘Thank you for your time.’ ” Then she would hang up.

Her current job is an improvement. The hours are similar, usually from 8 p.m. to 5 a.m. Generally, people are happy to hear from a person with job openings.

The company’s training is broken into three parts. First, Indian recruiters learn how to understand job descriptions, where a job is located and how much it pays. Most of the jobs pay an hourly wage.

“That’s a new concept for us. In India we don’t get paid by the hour—we get paid by the month,” Anandakumar says. Second, recruiters learn how to find candidates. Using key words, they search online communities like LinkedIn, Craigslist, Yahoo and Google groups, and alumni associations.

Once potential candidates are identified, recruiters inspect the authenticity of the résumé they have submitted and whether a person’s credentials make them good enough to call.

The anatomy of the call goes like this:

First, seek permission.

“Dominique? Is it a good time to talk with you about the position? Perfect.” Chandrashekar is back on the phone with her prospective candidate.

Next, interview the candidate. Get them to talk about their experience.

“Can you explain to me a little bit about your position with West Valley Construction?” Chandrashekar asks. “OK. When you said underground construction, what exactly was your position there? What exactly was your role?”

Finally, recruiters must go over the details of the job, its pay rate and whether candidates have any problem with a background check or a drug test. Once a recruiter identifies a potential hire, they give the information to the employer or staffing agency in the U.S., which conducts a face-to-face interview.

But getting to that stage is not easy. Rodriguez turns out to be a good candidate because he’s a construction worker looking for full-time work. One problem quickly arises: Rodriguez’s cell phone signal fades, and with it, the chance—at least for now—to fill a job in California.

“Hello, Dominique? Your voice is breaking up,” Chandrashekar says. This time she nails the sound of the “v.” But to no avail. The line goes dead. Undeterred, she returns to her list of potential candidates and prepares to make another call.

BANGALORE—In a second-floor office off a dusty street here, computer engineers are building electronic health records for the American market. It’s just after 6:30 p.m. in late May and the evening snack—dahi vada, a local dish of fried dough drenched in a sweet yogurt sauce and topped with ground chili—has been served, as it is every day, to give employees an energy boost as they head into that time of day when the instant-messenger icons on their computers spring to life.

    More than 8,000 miles away, it’s morning in the United States. Computer engineers at Allscripts Healthcare Solutions, a software company with nearly 1,000 employees, begin to shuffle into the company’s nine U.S. locations. They prepare to discuss with their Indian counterparts how much progress was made on the project while the U.S. team was asleep.

    The American and Indian engineering teams are not part of the same company, but in order to take advantage of their 24-hour development cycle, they must act as one.

    The Indian team is HealthAsyst, a small software firm whose executives happily describe themselves as part and parcel of their American client’s workforce. This is exactly how Allscripts’ chief executive, Glen Tullman, envisioned outsourcing his development to India.

    “This isn’t about going somewhere and simply getting the lowest cost,” Tullman says via telephone from his company’s Chicago headquarters. “This is about getting the right talent at the right time.”

    Though still far cheaper than labor in the U.S., India is not the bargain it once was, for all the familiar reasons. The economic boom of the world’s second-fastest-growing economy (9.4 percent growth predicted for 2007) is straining the infrastructure of major cities, driving up the cost of real estate, creating salary inflation and setting off talent wars so fierce that a job candidate who accepts a position on Friday may decide to go with a different company come Monday. No one is more aware of this than Indian executives and their employees.

    Their solution, however, is not to race other outsourcing countries to the bottom of the economic ladder, but rather to the top. Instead of being the least expensive place to outsource, they want to offer the greatest value. And this strategy has changed the value proposition India offers potential customers: Rather than doing for cheap what they currently do—be it operating call centers, developing software products or managing a company’s IT infrastructure—Indian companies want to do more. They want to charge their partners for it and, better yet, share in the revenue they help create.

    There’s one catch: The company that is outsourcing must be prepared, in many cases, to work more closely with Indian workforces or, at the very least, see them not as a low-cost, low-skill labor set that operates in a vacuum, but as an extension of its own workforce. The question for executives of outsourcing companies, then, is this: Are you ready to commit to India?

    “Any company that wishes to outsource must have total clarity as to why it’s outsourcing,” says Rajan Bhandari, a senior manager and retired Indian navy commander who runs the New Delhi call center of iGate Global Solutions, an IT outsourcing company that is a subsidiary of Pittsburgh-based iGate Corp. Bhandari speaks in a tone that is both measured and forceful, and his voice booms over the hum of the air conditioner inside the company’s New Delhi office.

    “Is it outsourcing merely because its bottom line is hurting and it needs to keep the wolf from the door? That’s fine. It’s OK for the short-term solution. But these short-term solutions don’t hold for beyond a year because the wolf will come back to the door with an ever larger appetite.”

Business evolution
    To develop this clarity, one must first understand that the history of outsourcing is the story of Indian companies—and their employees—moving up the value chain.

    “When people think of what’s happening in India, they tend to think it’s low-end coding work and basic-level stuff,” says Subash Rao, head of HR in India for Cisco Systems. “That’s no longer true.”

    Or at least it is no longer the only truth. Thanks to India’s history as a British colony, a rich cultural legacy that has long valued education, especially in the sciences, and the country’s location in a time zone nearly 12 hours away from the U.S., India was uniquely positioned to be the first to take advantage of outsourcing opportunities.

    The seeds for India’s economic boom were planted in 1991 when the Indian government reversed a closed-door economic policy that had driven away foreign investment since the late 1970s. This economic liberalization infused the country with much-needed capital from companies like IBM and General Electric, which were among the first to take advantage of India’s low-cost talent pool.

    The rest of the world awoke to outsourcing in the late 1990s when Indian companies successfully proved they could manage high-volume, low-skill work. By fixing a computer’s date with a simple change of code, Indian engineers helped the world avert the impending doom of Y2K. Such high-volume, low-skill “process work” moved into other areas. Computer engineers took on projects maintaining and upgrading old software. Those with a college degree found opportunities, more recently, in business process outsourcing, doing data-entry processing of auto-insurance and dental claims.

    It can be mind-numbing work, says Ravi Vadapalli, global director of training and development for Virtusa, an IT consulting firm based in Westborough, Massachusetts. In his office in Hyderabad, an outsourcing center in southern India where Microsoft has its Indian headquarters, Vadapalli describes how it can look to the worker in India: “A thousand dental claims come in. There’s a software here, I look at something and click. Look at something, click. Look at something, click. That’s the lowest end. It gets meaningless. I have to work only for the money. So that’s a huge workplace stress.”

    Demand for workers and the nature of the work have led to high employee attrition rates in India, which today average around 40 percent in business process outsourcing and 15 percent in the higher-skilled IT services.

    Meanwhile, the sector is voracious in its need for workers. In 2007, 1.6 million professionals worked in India’s IT/BPO industry, according to Nasscom, the industry group representing Indian software companies.

    And though nearly 3 million young Indians graduate college every year, it has become harder and more expensive to recruit for low-end business processing and information technology work. Nasscom predicts that at current growth rates, the sector will need 2.3 million workers by 2010 but will have a supply of only 1.8 million, a shortfall of 500,000 knowledge workers.

    Some Indian companies, confident in their ability to train employees, have begun to hire younger, cheaper workers. ’’

    “What they’re saying now is, ‘Guys, you’ve done high school. That’s enough,’ ” Vadapalli says. ” ‘You don’t need to go to college; come to my workplace and I’ll get you a degree.’ “

    Many Indian executives worry that India cannot remain competitive as a country that goes only for the lowest-end, lowest-cost outsourcing contracts. Salaries alone are cheaper in Vietnam, according to a June 2006 report on global outsourcing salaries by consulting firm NeoIT in San Ramon, California. In 2006, salaries increased nearly twice as fast in India (14 percent) than in China and the Philippines (both 8.1 percent) and Thailand (6.5 percent), Hew¬itt Associates reported in its annual compensation survey.

“When people think of what’s happening in India, they tend to think it’s low-end coding work and basic-level stuff. That’s no longer true.” –Subash Rao, head of HR in India, Cisco

    India’s IT sector is predicted to generate $47.8 billion in revenue in 2007, more than doubling from $21.6 billion in 2004. The great majority of that revenue—an estimated $39.4 billion in 2007—comes from outsourcing contracts, so Indian companies hope that such results will prompt their overseas clients to stay with them even as their services grow in cost and complexity. So far, if revenue growth is any measure, this transition to higher-end work has already begun.

    “The world is slowly waking up to Indian talent,” says Ameet Nivsarkar, vice president of Nasscom. “Over a matter of time, managers have realized the value the Indian workforce can bring to their team, and there is a significant amount of high-end work that is being shared.”

    Business process outsourcer 24/7 Customer is based in Los Gatos, California, but the bulk of its 5,000 employees are offshore. To that company, creating value means using analytical modeling to make predictions about a customer’s buying habits and shaping its own workforce in accord with those findings.

    Vasudevan Bharathwaj, chief marketing officer at 24/7 Customer, describes what a medium-sized online retailer could learn from his company. (Bharathwaj would not name his clients, but think of janitorial supply company ReStockIt.com or New York-based electronics company J&R Electronics.)

    For example, a middle-age man calling Bangalore from Los Angeles around 6 p.m. PST has a higher likelihood of buying the latest computer gadgetry if he’s talking to an Indian cyber-salesman who hails from a small city and whose father was a low-level government bureaucrat. Bharathwaj says 24/7’s statistical analysis shows that young salesmen from smaller cities whose parents did not make a lot of money make better salesmen, especially when the customer is male. He thinks some Americans, who may know nothing about the Indian sales force, may connect in an unspoken way with such a salesman and therefore be motivated to buy from him.

    The goal of using this kind of analysis is to create intellectual property—predicting consumer behavior, for example—that clients can use to generate revenue to be shared with 24/7.

    The drive to create greater value is especially true in product development. HCL Technologies, a New Delhi-based technology company with 43,000 employees worldwide and $1.27 billion in revenue last year, calls its approach “co-sourcing.”

    HCL, which offers pro¬duct engineering, IT services and business pro¬cess outsourcing, tends to keep a low profile. Most of the world doesn’t know that the company’s engineers helped develop Microsoft’s Vista operating system and the computer technology on Boeing’s new 787 Dreamliner. In a typical arrangement, about 1,200 HCL employees work on a networking project for Cisco Systems’ office in Bangalore. In every way except their paycheck, they are Cisco employees.

    Whether the client is in Denver or Delhi, interaction between the two workforces has increased fifty-fold, from quarterly communication to daily interactions, says Vineet Nayar, president of HCL Technologies.

    “The question of the two workforces interacting has become by far the most important element in the success of a project,” Nayar says.

Building soft skills
    Integrating the two workforces, if only by instant messenger, still requires a large measure of communication, analysis and discretionary decision making. As a result, a focus on softer skills has permeated most Indian companies.

    At Wipro Technologies’ 120-acre Bangalore headquarters, a leather-bound copy of Stephen Covey’s The 7 Habits of Highly Effective People stands out against the stack of computer software manuals like a Bible on a newsstand. But the self-help book is there for a reason.

    “Five years ago, our focus was on technical skills, writing code,” says Selvan Dora¬i¬raj, Wipro’s senior vice president for training. “Today, 50 percent of our effort is there, on coding. The rest is on consultant training, management skills, customer-facing skills.”

    Wipro invests 1 percent of its revenue in training. In 2006, the company spent $18 million—or 1 percent of its $1.8 billion in revenue from its global IT services and products division—on training materials and personnel, including seminars that go along with Covey’s book, and 75 courses on technical and management skills. The company has more than 140 teachers, 30 of whom are certified professional behavior analysts. Their job, in part, is to teach employees how to better interact with clients so as to avoid the cultural miscues that can easily metastasize from annoyances into crises.

    “The purpose of this training is to combat the ‘Indian wiggle,’ ” says Gurudutt Rao, a trainer for Wipro. The term refers to the way Indians nod their head side to side to say yes. It’s a gesture that could be construed in the U.S. as shaking one’s head to say no. It is also a larger metaphor for the importance of bridging cultures to communicate effectively.

Desire to make a difference
    The march of Indian companies up the value chain is, in many ways, an ineluctable product of ambition and necessity.

    “There is a lot of fire-in-the-belly syndrome in India today,” says Prabir Jha, global chief of human resources for Indian pharmaceutical company Dr. Reddy’s Laboratories. “Indian companies really want to take on the world.”

    Nowhere is this more evident than in the changing expectations young Indian workers have for their careers.

    “The current workforce is highly ambitious in terms of their career,” Wipro’s Dorairaj says. “If they are not satisfied, they will continue to move on.”

    Money is but one part of that decision. After working nearly four years for a small software company in Calcutta, Saptarshi Roy thought he’d gotten his big break. In 2006, he landed a job with the title of senior software engineer with Wipro Technologies’ Bangalore campus.

    Roy, 29, quickly discovered that his lofty job title didn’t accurately reflect the work he was doing, which was the simple, almost rote computer work of checking for bugs in software that runs the printers, scanners and other hardware of Wipro’s Japanese client Toshiba. It was precisely the kind of process-driven quality-assurance job that has fueled India’s outsourcing boom. But it was boring.

    “The job was very low-end,” he says.

    Six months later, he quit. Roy ended up at Health¬Asyst. This summer he spent a month working at Allscripts’ office in Libertyville, Illinois, near Chicago. During that brief stay, he visited New York City, which, he wrote in an e-mail, “rockz.”

    Allscripts’ decision to outsource was driven by the need to bring products to market faster. From the start, the company saw that the best way to develop products faster was to treat its Indian vendor as a partner.

    “We want to treat them as if they’re part of the company, because if we are paying them to do something they are critical to the company,” says Tullman, who in addition to being CEO of Allscripts is an Oxford University-trained social anthropologist and has traveled to India nine times. “You are never going to get the same level of success as when you treat them as a partner.”

    Clearly, not all companies are looking to India to help develop new products. If all companies want is a less expensive way to manage payroll and other back-office functions, or if they perceive India’s ambition to move up the value chain as a threat to them and their onshore employees, they won’t have the commitment needed to make India work, Indian executives say. Executives who want to successfully outsource to India must be committed to seeing the work mature, and they must prepare their own workforce to move up the value chain alongside their vendors, iGate’s Bhandari says.

    “A successful offshoring effort is when employees grow and the seats they’ve left are filled by their offshoring partner,” he says.

    The conference room has grown quiet. At nearly 10 p.m., the sun has long since set on this muggy May night. The incessant honking of cars and the 100-degree heat outside have finally begun to dissipate. Then Ritu Arora, a divisional head of learning and development at iGate, sitting next to Bhandari, explains that point further. With a smile on her face, she aims to convert the skeptical: American executives who commit to India, who see the Indian workforce as an extension of one’s own, would reap the greatest rewards for their risk.

    “Then the team here feels a critical part of the work,” she says. “We feel that we matter, that we are recognized, and that the work we do makes a difference.”

Workforce Management, August 20, 2007, p. 1, 22-32 — Subscribe Now!

At first glance, the Dow Chemical Co.’s effort to use the lure of money to improve patients’ health and reduce costs seemed like a roaring success. When the three-year pilot program in South Charleston, West Virginia, ended in 2004, the company calculated that preventing illnesses from spiraling out of control saved it $1 million.

    But no sooner had the company distributed the money—a quarter-million dollars each spread among participating employees, doctors, a health management company and Dow Chemical itself—than the firm decided to cancel the program.

    “There were difficulties in the whole system,” says Gary Billotti, leader of the Midland, Michigan-based corporation’s health and human performance management initiative. “We couldn’t expand it at that point, given other priorities and other projects.”

    Chief among the problems was communicating with employees in the program—who numbered 1,000 at the time—their dependents and retirees. Many of them did not use the Internet, where most of the program’s information was located.

    Dow ran into problems getting doctors accurate and timely information about their patients because the level of health information technology varied among doctors. The company also downsized in the state, thereby diminishing the power it had as a health care purchaser to change physician behavior.

    All told, the failure of the Dow effort to go from pilot project to prime time reflects the challenges individual employers face trying to create sustainable change in a fragmented health care market.

    Dow’s program also provides lessons to other employers interested in getting involved with pay-for-performance projects under way today. The most notable efforts are being coordinated by Bridges to Excellence, a nonprofit organization supported by employers, health insurers and doctors.

    The goal of pay-for-performance programs is to change the health care system so that doctors get paid not for the services they provide but for the outcomes they produce—healthy patients.

    Some employers feel pay for performance is deeply flawed in principal.

    “From the purchaser perspective there has historically been resistance to paying [doctors] to do something you thought you were paying them to do anyway,” says John Miller, executive director of the Mid-Atlantic Business Group on Health. “But companies are becoming more pragmatic and they understand that it will take some investment to reform the payment method that has historically been used.”

    What they want is a program that is easy to administer. That was the main hurdle with Dow.

    “Logistically and administratively, it takes effort,” Billotti says. “And it took more effort than we had originally anticipated.”

    The appeal of a program like Bridges to Excellence is that employers don’t have to get bogged down in defining the rules of the game. The group has four areas of focus right now: diabetes management, heart disease, chronic back pain and promoting the use of health information systems.

    More than 3,000 doctors in 12 states have been paid $7.6 million for improving the health of their patients. Though there are other pay-for-performance programs being run by health insurers, one of the advantages of Bridges to Excellence, participants say, is that it offers a widely accepted standard for assessing patient care and one way to report their patients’ health status.

    “We hear from the physician community that there’s too much clutter out there. They can’t maintain the administrative burden of reporting if there are five different methodologies of assessing performance and rewarding results,” Miller says. “Bridges to Excellence makes it easier for doctors.”

    One of the major differences between Dow’s effort and those using the Bridges to Excellence model is that payments are made only to doctors. And unlike with Dow, payments are based on the health improvement of patients.

    In the Bridges to Excellence diabetes program, for example, patients must meet five measures to be counted toward a doctor’s overall score. Patients must have a blood sugar count that indicates their diabetes is under control; LDL—or “bad” cholesterol—level must be below 100; blood pressure must be less than 130 over 80; patients must not smoke; and patients who are 40 or older must take an aspirin every day. Twenty percent of a doctor’s diabetes patients must meet the criteria in order to receive a cash reward.

    In the Washington, D.C., area, the Bridges to Excellence program, “Physician Office Link,” focuses on the use of information systems to improve patient care.

    The program aims at introducing electronic medical records and electronic prescribing. It encourages doctors to use systems to track patients with chronic illnesses, health risk assessments and disease management programs to help patients navigate the health care system.

    The payments so far have totaled $2.6 million. They max out at $20,000 per physician and are meant to offset the cost of purchasing a medical records system. But it remains to be seen whether electronic records improve people’s health.

    “On a personal level, I feel that it works,” says Ann Doyle, a nurse who is helping to administer the Bridges to Excellence program for CareFirst Blue Cross Blue Shield, which represents the Mid-Atlantic region and is funding the effort. “We’re waiting to see whether the data verifies that.”

    Local employers are waiting too. So far none of the employers in the Mid-Atlantic Business Group on Health have funded the CareFirst-sponsored program, even though they may benefit from it.

    One reason, Miller says, is that each of his member companies represents a small slice of the overall market, which is a problem Dow faced when it downsized in Charleston. This makes it hard to convince a CEO that the company’s investment would be money well spent.

    “For that reason we think it makes more sense for this stuff to be implemented by the managed care organization,” Miller says.

    Together, the Mid-Atlantic Business Group on Health may make a difference. On June 21, 18 of its largest employers, representing 400,000 insured lives, met to consider funding the program.

    Dow, meanwhile, has taken the lessons from West Virginia and moved on. The company is developing a consumer-driven health care plan that covers an expanded array of preventive medicine that is expected to be available in 2009. The company is also involved in efforts to promote the use of health information technology in Michigan.

    Those supporting employer efforts still believe purchasers have the power to change the market, even if much of the return on investment has not yet been measured.

    “They are doing it on faith, but there will be an ROI,” says Linda Davis, a consultant for the Bridges to Excellence program run by the Buyers Health Care Action Group, a local business group in Minneapolis. “Employers need to start stepping up to the plate and being involved in changing the focus to quality of care rather than quantity.”

Sometimes, especially during complex, expensive medical cases or emergencies, doctors will misdiagnose an illness or mistakenly suggest a certain treatment. The result is poor but costly medical care. The reasons for errors are as varied and complex as the medical system.

    Many patients are not equipped to second-guess their doctor. Sometimes they seek another opinion; and sometimes that second opinion is given by a colleague of the first doctor who may not want to contradict his friend.

    Doctors have also been known to practice “defensive medicine” and over-prescribe treatments to avoid a malpractice lawsuit. Or, quite simply, doctors are overworked and don’t have enough time or information at hand to accurately assess a patient’s health.

    Such intricacies make it easy to understand why health care dollars are not spent wisely and why some employers want to cut costs by focusing on quality. The goal, to borrow a phrase from manufacturing, is to get the right treatment to the right patient at the right time.

    One strategy employed by companies like EMC Corp., ConAgra Foods and Waste Management Inc. is to provide employees the option of getting a second opinion from a company specializing in them.

    Best Doctors is a Boston-based company started by doctors affiliated with Harvard University School of Medicine who felt they could diagnose and treat illnesses accurately by having experts in their specialties exhaustively review patient medical data collected from doctors, labs, hospitals and pharmacies.

    “We’re not just saying to the patient, ‘Here’s a doctor. Good luck,’ ” says Best Doctors CEO David Seligman.

    Seligman says the second opinions given by the company’s stable of 50,000 physician specialists and nurses have altered people’s diagnoses 22 percent of the time and treatment in six cases out of 10, with 100 percent accuracy.

    In January, Boston-based data storage company EMC made Best Doctors available to its 19,000 U.S.-based employees after a trial run was deemed helpful in improving people’s medical care. Since then, 70 people on EMC’s health plan have used Best Doctors to get a second opinion; 88 percent have had their treatment plans changed and 12 percent have had a change in diagnosis, says Delia Vetter, senior director of benefits for EMC. So far the company has saved $80,000.

    Though EMC did not disclose the cost of the program—Best Doctors charges employers a monthly fee based on the number of employees with access to the service—Vetter says, “Ultimately, in the long term, we expect the program to pay for itself.”

    One patient’s severe dizziness was originally misdiagnosed as a rare disease caused in part by a swelling of fluids in the ear. Best Doctors’ specialist recommended repeating certain tests and consulting with a neurologist, who then re-diagnosed the illness as a type of migraine.

    Another patient was diagnosed with a pulmonary embolism, a condition that occurs when an artery in the lungs becomes blocked. The diagnosis was correct, but it turned out the prescribed surgery wasn’t needed, which saved the company $21,000.

    While the service is available free to all EMC employees, it’s particularly useful to the 6 percent of the workforce whose health care spending last year totaled half the company’s health care costs. EMC would not disclose how much it spent on health care, but its 2006 annual report shows that costs rose 9 percent last year, down from an increase of 11 percent in 2004.

    One EMC employee, Laura Aubut, a 44-year-old finance manager, had a particularly complex medical case. She says the in-depth assistance provided by Best Doctors, which she used during EMC’s trial run with the service, helped her make the right decisions along the way.

    In 2005, just days after giving birth to her second child, Aubut woke up with numbness in her right arm. Emergency room doctors told her she had had a small stroke. A blood clot in her leg slipped through a hole in her heart, into her bloodstream and up to her brain.

    “I was horrified,” she recalls.

    Around the time a specialist told her she needed to have the hole fixed, she learned of Best Doctors and decided to seek a second opinion.

    More than anything, Aubut was scared of surgery and overwhelmed by her circumstances. She wasn’t sure what to do.

    Best Doctors agreed that she needed to fix the hole. They also suggested seeing a neurologist. During this time, doctors told her she initially needed to treat a condition causing her internal bleeding. If she didn’t, she could bleed to death on the operating table, she was told.

    After treating that problem successfully, and satisfied she had done everything she could to make an informed decision, Aubut had the surgery. She praises Best Doctors for its guidance during a trying time.

    “I could have kept seeing one specialist after another,” she says. “But I said, ‘I’m comfortable with what I know now. I’m not scared now like I was before.’ “

Some employers are trying to change the health system to prevent medical errors from occurring. Others may opt to provide employees with tools that will help them make better decisions about their medical care.

Ilene Corina’s son died from a medical error more than a decade ago. Now she helps run Pulse, an organization that provides education programs she refers to as the “driver’s ed of patient safety.” The programs run a half-hour to a half-day and are taught to “the general public wherever they congregate.” Pulse has taught community groups, schools and the AARP. The organization would like to expand the course to employees in the same way that employers teach workplace safety and nondiscrimination.

Pulse covers topics on health literacy such as how to avoid infections, where to find how many times a doctor has performed a certain procedure, what criteria patients should look for in a hospital and how to check medication to make sure it has been correctly prescribed and dispensed. The programs also encourage patients to ask questions and become more involved in their health care and teach people how to become patient-safety advocates for friends and family members who are hospitalized during an emergency.

Corina, a resident of Wantagh, New York, on Long Island, believes employees who take the free course should get a discount on their health care premiums, just as teenagers who take driver’s education classes get reduced auto insurance rates. In the long run, doing so would reduce costs associated with medical errors, she says.

“When my son died, my employer let me take weeks off. My husband took even more off because he had a breakdown,” she says. “But employers are not looking at it as a result of a medical error; they are looking at it as a sick day.”

The skills Corina teaches now are ones she wishes she had when her son was admitted to the hospital in 1990 to have his tonsils removed. It’s among the most common procedures, yet her son bled to death from a botched tonsillectomy and a subsequent infection.

“How am I supposed to know that people die from tonsillectomies?” she says. If she had known that, she says, she would have demanded more information and “maybe he wouldn’t have died.” More information is at www.pulse america.org.

Organizations like the National Patient Safety Foundation are also clearinghouses for educational tools.

Helen Haskell has become a more forceful advocate of patient safety after her son died from a medical error in a South Carolina hospital. She hopes employers agree that harmful errors can be prevented if patients are educated to be consumers of safer health care.

“My son had essentially a cosmetic procedure that was much riskier than we realized,” she says. “There was medical literature documenting the risk, but we just didn’t understand the risk. It’s true of most people who have surgery.”

Health insurers, as well as some employers and consumer-oriented Web sites, are providing more information on the quality of hospitals and doctors. Philadelphia-based health insurance company Cigna offers reduced costs to members who go to doctors and hospitals that are recognized for the quality and safety of their health care by the Leapfrog Group and the National Committee for Quality Assurance—organizations focused on improving the quality of health care. Cigna’s Web site also ranks specialists and hospitals according to how they perform.

“What we do is try to raise the odds that folks can avoid medical errors,” says Cigna spokesman Joe Mondy.

Most patients, however, are unaware that the rankings exist, Corina says. She believes employees need basic training in how to approach health care decisions.

“Employers need to make sure their employees are safe,” Corina says. “The way they do that is to make sure their employees have knowledge.”

Workforce Management, June 11, 2007, p. 18 — Subscribe Now!

S omewhere between not providing health insurance at all and offering the kind with a gold-plated price tag, there exist a growing number of alternatives. One of the most popular is the “limited benefit” health plan.

    Limited-benefit plans are sometimes known as mini-medical plans, a name the health insurance industry decries. They cover what most Americans refer to when they talk about health insurance: doctor visits, prescription drugs or a trip to the emergency room.

    As the name suggests, though, the health coverage is limited—to a certain number of visits to a doctor and a several thousand dollar limit on prescription drugs and hospitalizations, depending on the plan. And it is not insurance per se, since a typical limited-benefit plan would not cover a catastrophic illness as such an event would max out its hospital benefits after a few thousand dollars.

    Instead, these plans are aimed at providing what the majority of Americans use: the occasional checkup, a trip to the emergency room and prescription drugs for a cold. According to Milliman, an actuarial and consulting firm, 99 percent of Americans accrue less than $50,000 a year in health care costs.

    Limited-benefit medical plans are aimed at retail and service industry employers whose hourly workers often live paycheck to paycheck, don’t own a house or car and either can’t afford health insurance or work for a company that can’t afford to offer it.

    These workers also have little to protect them should a catastrophic event result in medical bills that would otherwise send them into bankruptcy.

    “They are less interested in protecting assets,” says Eric Motter, vice president of marketing and product development for Cigna’s emerging market segment. “They’re interested in protected income.”

    Monthly premiums for limited-benefit plans run anywhere from $10 a week—or about an hour’s wage for the worker making $20,000 annually to whom the plans are targeted—to $200 a month for something like the kind of major medical health coverage used by the approximately 150 million Americans who are covered by private employers.

    “When someone is making $25,000 a year, it’s hard to justify as a company paying $300 to $500 a month for health benefits,” says Derek Peterman, CEO and founder of Irving, Texas-based Century Healthcare, an insurance company solely focused on limited-benefit medical plans. “But if you pay $50 to $75 a month, then it makes sense if you want to retain them.”

    He says the average monthly cost is $110 and that 90 percent of the employers who purchased the plan pay at least half of that cost. Plans with higher monthly premiums of around $200 are geared toward people who are coming off a major medical plan because they or their company can no long afford it. Those plans provide “98 to 99 percent of anything that’s going to happen to you, including some catastrophic” hospital coverage of up to $25,000, Peterman says.

    “You could have that heart attack or that stroke and not be financially destroyed, so to speak,” he says.

    With about 47 million uninsured Americans—most of them working people—major insurance carriers like Cigna, Aetna and UnitedHealth have in recent years acquired companies that specialize in limited-benefit health plans. After acquiring Star HRG in mid-2006, Cigna in October launched Fundamental Care, which is designed to cover all non-catastrophic events, Motter says. Employers must pay 25 percent of the premium for this plan—in part to ensure participation and keep healthy employees from dropping out of the risk pool. Cigna now covers 200,000 lives and 1,400 employers through its Star HRG subsidiary.

    Ratner Cos., a Vienna, Virginia-based chain of hair salons, has 14,000 hairstylists who make an average of $25,000. They are young, mainly women and work in salons like the Hair Cuttery, Bubbles, Salon Ciello and Color Works at 1,000 locations along the Eastern Seaboard and in Illinois, Indiana and Wisconsin.

    At one point Ratner offered its hairstylists a major medical plan, but even with the company paying 50 percent of the cost, the majority could not afford it and did not enroll. The 10 percent who did enroll were the sickest employees and tended to spend the most on health care. The result was a spike in health care costs, and the company decided to stop offering major medical benefits. Now, the company offers a limited-benefit plan and pays the premiums for those who work 25 hours or more a week. The low cost of the premium has allowed many part-time workers to enroll too. Eighty percent of workers now have health insurance and the company’s health care costs have remained steady, says Candice Mendenhall, senior vice president of human resources.

    “What’s important to us is that if we spend the same dollar amount and we’re able to cover 80 percent of our people rather than 10 percent of our people, that’s what we wanted to do,” Mendenhall says.

    Peterman, whose company sold Ratner the health insurance policy, says Century offers employers several ways to curtail costs. For employers that cover employees but not dependents, the company offers a health plan for dependents only. The company also says its plans may appeal to employers who are looking to limit or end retiree health benefits.

    Critics have pointed out that limited-benefit plans may cause some confusion for those who believe they will be covered in the event of a serious illness or event.

    “Certainly, I think plans are very aware that when they have a product that has a front end and no back end, it’s absolutely in their best interest to be as clear as possible,” says Jill Yegian, director of research and evaluation for the California Healthcare Foundation.

    “One of the things we have found is that these products are quite easy to attack because they are not comprehensive, but it’s also important to think that this is a product that may meet a need of a population that doesn’t get value from the current system.”

    Mendenhall says the plan is a better alternative to some of the more popular options, like health plans with high deductibles.

    “What is going to be the most helpful to them?” she asks. “They don’t have $3,000 in their pocket. They’re living paycheck to paycheck. And this plan gives them first-dollar coverage.”

CNH Case New Holland, an agricultural machine manufacturer, announced in 2000 that it would discontinue retiree health benefits for new employees, and those employees who were eligible for retiree health benefits would have to pay for 60 percent of cost increases beginning in 2006.

    Double-digit health increases and wasted money—more than 70 percent of employees were paying family premiums of more than $2,000 a year but spending $1,000 on actual health care—were the culprits.

    “We had to draw the line,” says Amy Kesler, a company spokeswoman. In fact the Racine, Wisconsin-based company had to overhaul its benefits not just to reduce costs but to prepare employees for the future.

    “The change was needed to help employees save for retirement,” Kesler says.

    The first thing CNH decided was that no matter what new plan it created, the company would pay the same amount for each of the four plans it offered, keeping its costs fixed among plan designs. It would be up to employees to decide what kind of coverage they wanted.

    Of the four plan designs CNH introduced in 2006, two would look familiar to any benefits-plan designer. A preferred provider organization network appeals to people who know they will use a lot of health care—those with chronic illnesses or planning an elective surgery. The PPO plan has the highest monthly premiums but the lowest deductible: a $92-a-month premium for salaried employees, a $300 deductible, and a 15 percent co-insurance up to an $1,800 out-of-pocket maximum for employees who earn less than $50,000 or a $2,300 out-of-pocket maximum for employees earning more than $50,000. Forty-three percent of participants enrolled in the PPO plan.

    The drawback is that in a world without retiree health benefits, the plan offers no option to save for retirement health care expenses.

    A second option is a high-deductible plan: $2,200 for single coverage, with a health savings account. The company did not fund the savings account, but with premiums of just $5 a month for salaried workers, 13 percent of them signed up. Whether individuals will take their savings and invest it in their accounts for future use remains to be seen. Experts say employees at companies that do not fund accounts generally don’t fund it themselves, either.

    “I’m not convinced that people are taking savings and putting it into health savings accounts,” says Chris Calvert, vice president and senior health consultant at Sibson Consulting. “Most are taking the extra $100 a month and at the end of the year buying a plasma TV.”

    CNH also created its Consumer Choice Plan and Consumer Choice Savings Plan, both of which are intended to take a portion of a person’s savings and siphon it into a health retirement account. The account is owned by the employee after five years of employment.

    The Consumer Choice Plan features two deductibles separated by a health reimbursement account, which is funded and owned by the company to pay for individual employee health expenses.

    For individuals, the first deductible is just $250. After that deductible is met, employees will use the $1,000 from the company-funded health reimbursement arrangement to pay for care. After that $1,000 is spent, employees must pay a second deductible of $750. Meanwhile, preventive care is covered 100 percent and prescriptions are covered at 70 percent of cost after a $50 deductible.

    Though the secondary deductible is itself a new way of looking at these plans, things get really interesting if money remains in the account at the end of the year. This is when the company automatically siphons a portion of the health reimbursement account into a company-owned retiree health account and then applies the rest to next year’s deductible. With a twist, of course.

    For individual plans, only $500 of the money left over at the end of each year can be used to pay for next year’s deductible. The rest goes into a health retirement account.
“If you don’t spend it you don’t lose it,” Coogan says. But, he adds, “Some of it has to go to pay for retiree medical.”

    For example, if none of the $1,000 CNH originally contributed is used, that rolls over to next year’s accounts. Of the $1,000, $500 is put toward next year’s $1,000 deductible and the rest is put into a health retirement account that earns interest and can be owned by the employee after five years.

    The reasons for designing the plan in this way are manifold. One is to counter an argument that is being heard with increasing frequency: Consumers are no longer price conscious once they build up an HSA that is larger than the deductible. Many say this is nonsense, since an HSA is real money owned by individuals. But at CNH, no matter what the savings habits of employees, each year they will have to pay out of pocket for a portion of their health care.

    “It keeps employees aware of the cost,” Coogan says. “Otherwise you are almost back to providing first-dollar coverage.”

    By tailoring the Consumer Choice Plan this way, the plan does not meet the federal guidelines for an HSA.

    The Consumer Choice Savings Plan, on the other hand, has a $2,200 deductible for single coverage, making it eligible by law for an HSA. The idea behind this plan is that employees who are near retirement can fund the HSA themselves and combine those savings with the leftover money in the company-funded HRA. This plan attracted 4 percent of participants. Forty percent of participants enrolled in the Consumer Choice Plan.

    The company is calling the changes a success. Its projected cost increase for 2007 is 3 percent. Critics have said these plans are overly complicated, but Kesler says constant communication with employees made the transition easy.

    “Communication is key in rolling this out,” she says. “And it will continue to be important.”

Workforce Management, April 9, 2007, p. 29 — Subscribe Now!

New York Life Insurance Co. is a good example of an employer that responded to the limitations of conventional high-deductible plans by tailoring a more customized health benefit that combines elements of managed care and consumer-driven plans.

    The company, based in New York, has a paternalistic streak, says Maria Mauceri, a vice president and actuary. In keeping with New York Life’s motto, “The company you keep,” its approximately 8,400 employees tend to work there for a lifetime and have come to expect the company to handle all of their health care needs.

    Facing 10.5 percent increases in health care costs, New York Life decided in 2005 to change its benefit design to make employees more sensitive to cost. With the help of consultancy Towers Perrin, New York Life created four plans that went into effect in January.

    The most familiar option to employees is a plan that uses a health maintenance organization and covers 90 percent of health care costs until the employee hits a $3,000 out-of-pocket maximum—after which health care is covered 100 percent. (The prescription drug plan is separate and requires co-pays.) On the other end of the spectrum is a high-deductible plan with a health savings account. The deductible is $1,150.

    In the middle are the two hybrid plans, one that uses an HMO and another that accesses a PPO network. Each has two deductibles separated by a health reimbursement account.

    “We chose HRAs to give us the kind of flexibility we needed,” Mauceri says.

    For the HMO plan, the first deductible is $100, followed by an HRA that pays for the next $1,000 in charges, after which the employee faces a second deductible. This one is $500. The PPO plan is similar, except the first deductible is $250, the health reimbursement covers the next $750, and the second deductible is $750. All the plans have $3,000 out-of-pocket maximums for individuals.

    Mauceri says the co-insurance and deductibles force employees to begin to think about how much they are spending on health care.

    “Certainly the idea of personal responsibility worked well with senior management,” she says. Programs like disease management and wellness programs were of little interest.

    A portion of the unspent reimbursement account can roll over into a retirement health care account. Some can be put toward next year’s deductible, but not all.

    “What we’re trying to avoid is someone who would have so much money in their HRA they wouldn’t have a deductible,” Mauceri says.

    A portion of savings that employees accumulate will eventually be available to pay for their part of retiree health benefits that New York Life employees receive if they are older than 55 and have 10 years of employment. If they don’t retire with the company, they don’t get a penny of their HRA retirement accounts. Given these restrictions, 40 percent of employees went with the HMO plan with no deductible. Thirty-eight percent of employees went with the HMO plan with an HRA.

    New York Life projects savings of as much as 8.5 percent. It’s not a huge drop, but Mauceri says the goal was to make people sensitive to cost.

    “We were looking for something we could put in place so we don’t have to change plans every year. This has staying power for multiple years.”

Workforce Management, April 9, 2007, p. 30 — Subscribe Now!

The head of human resources at Wendy’s International earned $1.3 million last year and easily paid the $2,700 deductible on his health insurance without having to dip into his health savings account.

    A senior manager at American Express, on the other hand, whose income is more than $100,000, had an illness early last year that forced her to spend all of her health savings by midyear.

    And the director of a substance abuse program for Lutheran Social Services of Illinois, who makes slightly more than $50,000 a year, says he’s saved $2,400 in premiums in the 18 months since his employer switched to a high-deductible health plan. His savings on premiums, though, have not translated into much for his HSA. A diabetic, he tends to burn through his $2,200 deductible and has banked $600 in his HSA.

    Three different employees from three large employers; each has a unique story of what it’s like to be a health care consumer, how health care has changed in recent years, and how far the industry has to go before it is truly consumer-driven.

    They also are health care consumers who spend at least $1,100 of their own money before being covered by health insurance provided by their employers. Each employer has made a high-deductible health plan with an HSA a central feature of its benefits.

    The three employees are among the first of the estimated 4.5 million people who have high-deductible health plans that are eligible to open HSAs, according to a recent study by the American Association of Preferred Provider Organizations. The association estimates that about 5.5 million people have plans tied to health reimbursement arrangements, another kind of vehicle for health care saving.

    Congress and President Bush created HSAs in 2003 for people with high-deductible health plans, when health care costs were increasing 13 percent annually. The goal was to turn health care patients into health care consumers. Since then, consumerism has become a buzzword whose definition, like the plans themselves, has evolved to meet the changing demands of the health care marketplace and the shifting understanding of how people manage their health.

    At its inception, consumerism was a vision based on the belief that people faced with the choice of spending their own money or saving it in an interest-earning account would purchase health care more wisely. The result would be a health care market where consumers make rational decisions based on cost, quality and an incentive to save money. This would bring overall health costs down.

    The theory of consumerism, however, is coming up against the realities of a marketplace that has just started changing to meet the demands of health care consumers. Cost and quality information about medical providers exists piecemeal, but it is often based on estimates, not actual costs. Frustrated with the strictures of the federal law governing HSAs, some health benefits managers are designing their own health plans that combine elements of consumerism with coverage for services like prescription drugs and doctor visits.

If a patient has 30 minutes to manage their care, I think we want them to think about how to best manage their diabetes, not whether their health claim will get paid.” –David Cochran, senior vice president of strategic development, Harvard Pilgrim Health Care

   “Two years ago, most people were selling the theory of consumerism,” says Chris Calvert, vice president and senior health consultant at Sib¬son Consulting. “Now people are willing to say, ‘This is a process and it’s hard for employees and hard for patients, but we’re evolving and learning together.’ “

‘I felt empowered’
    The process of moving from theory to reality began for employees at Wendy’s International in 2005, when the Dublin, Ohio-based company switched 9,000 of its workers to high-deductible health plans with HSAs. Since then, Wendy’s premiums have been flat, says Jeff Cava, the company’s head of human resources. Nationally, health care premium increases are around 8.5 percent, more than twice the rate of inflation.

    But it wasn’t until last year that Cava had an opportunity to be a health care consumer and get a sense of what his employees were experiencing. Cava, 55, was vacationing at his second home in Winter Park, Colorado, bucking logs for firewood, when he ripped ligaments in his left shoulder while trying to lift a felled tree. Back home in Ohio he saw two specialists and, with the aid of a simple doctor ratings chart on UnitedHealth Group’s Web site, chose a doctor in his network. The company picked up 90 percent of the cost after he met the $2,700 deductible and until he reached a $4,000 out-of-pocket limit.

    Several weeks after the surgery, he received a bill explaining his benefits and what he owed.

    “I chose to pay out of my bank account rather than use my health savings account,” he says. “I have a lot of discretionary income, and at my age I’d rather let my HSA build up tax free and use it for retirement.”

   He sent his health insurer a check and that was the end of it.

    “I felt empowered [making health care decisions] because it was my money; I was writing the check,” Cava says.

    While acknowledging that cost was less of an issue because of his income, he says the company contributes to HSAs up to 60 percent of the deductible and that by the end of the year, most employees have saved money.

What’s the bill?
   Being a health care consumer was much more difficult for the American Express manager. She became sick early last year just after her company switched to a high-deductible health plan with an HSA. The marketing manager, who requested anonymity because she is not authorized to speak to the media, faced a number of health issues that forced her to visit several doctors and hospitals, as well as a blood lab.

    Among her unanticipated ailments was a pulmonary embolism that formed as a blood clot in her calf and migrated to her lung. In May 2006 she spent several days in the hospital, and by midyear she had exhausted her HSA for the year. Since she makes more than $100,000, dipping into her personal savings account would not have been a problem. What frustrated her, though, was the difficulty she had paying her bills from her HSA.

    “I have an American Express card that I use to make payments out of the account,” she says. “The challenge is, a lot of providers don’t take American Express right now.”

    Figuring out how much to pay for health care has never been easy. But since most doctors do nothing more than charge for co-pays, they are not equipped to tell patients exactly how much they owe at the time of a visit. Nearly all claims must first be adjudicated by a health insurer, which in turn dictates how much a consumer must pay. This makes it harder for people to pay with a health savings debit card at the point of service.

    “Real-time adjudication is quite a ways off,” Calvert says. Current systems, like those created by American Express and used by some doctors, can estimate the owed cost and then automatically deduct it when the claim gets adjudicated. Most doctors periodically settle their claims in large batches.

    “We’re working with an industry that is gradually evolving,” says Mark Keck, a vice president for new product development, health care, at American Express.

    The American Express manager eventually paid with the checks that came as part of her HSA. But it took about 10 hours on the phone—at one point she had to use a day off—to figure out exactly how much she owed and to whom. She often received bills that did not differentiate between what her costs totaled and how much she owed. She eventually received a letter saying an unpaid bill was going to a collection agency, which worried her.

    “Because it was my credit in my name, it became my issue,” she says. “If I hadn’t monitored those kinds of bills, I would have ended up getting a hit on my credit report, which would have been awful.”

    Turning patients into health care consumers inevitably forces them to think more about the cost of health care, especially since they are responsible for paying for it. But David Cochran, senior vice president of strategic development for Harvard Pilgrim Health Care, an insurer in Wellesley, Massachusetts, says navigating an insurer’s bureaucracy may leave consumers with no time to manage their health.

“I felt empowered [making health care decisions] because it was my money; I was writing the check.” –Jeff Cava, Wendy’s International

    “To make them more concerned because they are getting more forms they don’t know what to do with is not helping them make better [health care] choices,” he says. “It’s just confusing them.”

    Cochran, a doctor trained in internal medicine, uses the example of a diabetic to make his point. It’s vital, he says, that a diabetic understand how important it is to have low cholesterol, manage blood sugar levels and see a doctor regularly.

    “If a patient has 30 minutes to manage their care, I think we want them to think about how to best manage their diabetes, not whether their health claim will get paid,” he says.

    The financial worry that accompanies high-deductible plans is compounded when employees run out of money in their HSA. American Express, like other financial institutions, provides a credit line that turns health savings debit cards into credit cards. (Interest accrues after a claim is settled.) The credit line is intended to allow people to pay for medical services before they have a chance to build up savings in their accounts.

    “Offering credit is a way to ease that transition, especially in the early days when there is not a lot of money in the accounts,” Keck says.

    The American Express employee, however, is less enthusiastic.

    “I don’t really believe in paying interest on my health care,” she says.

Hybrid approach
    What some employers have begun to realize is that they can design health plans that encourage people to make cost-effective health care decisions by blending elements of consumerism—high deductibles and financial accounts—with aspects of coverage that employees have used in the past. The transition can be easier, benefits managers say, and employees may be more enthusiastic about the change.

    For example, CNH Case New Holland and New York Life Insurance Co., with the help of human resources consulting firm Towers Perrin, redesigned their health benefit plans to include two deductibles: a low deductible followed by an employer-funded health reimbursement account that was then followed by a higher deductible. The goal is to expose employers to consumerism while also covering most of the first $1,000 of health care.

    For the past four years, Harvard Pilgrim Health Care has been offering employees a high-deductible plan that covers doctor visits and prescription drugs. The idea is that superfluous charges are often incurred through unnecessary or redundant tests—MRIs, blood tests—whereas the most necessary and useful expenditures are on preventive medicine and regular visits to a doctor, Cochran says. Employees prefer this plan, and 45 percent have signed up for it, he says.

    The upshot of tailoring a plan to the needs of a particular employee population is that the plan might not meet the guidelines that make it eligible for an HSA. This may be one reason why the number of people who are eligible to open HSAs has not grown as quickly as some projected.

    Some health care experts argue that the federal law governing HSAs should be flexible enough so that treatment that is considered preventive is based on an individual’s personal health needs.

    Current law does allow certain types of preventive medicine to be covered before the deductible. For example, insurance can cover such drugs as cholesterol-lowering statins or ACE inhibitors, which are used to prevent the reoccurrence of a heart attack, before the deductible is met. These drugs, however, are not covered pre-deductible to treat an existing illness, injury or condition. (Employers and health insurers are allowed to cover preventive medicine under laws set up for HSAs, but are not required to do so.)

    Insurance companies and employers who fund their health insurance themselves are left to interpret Internal Revenue Service rulings to determine what they will cover. Some health plans for large employers—Aetna and Cigna, for example—cover diabetes medicines pre-deductible. Premera Blue Cross, which is based near Seattle, has determined, like other plans, that diabetes management medicines are not covered because they treat an existing illness.

    The result is that in many cases people do not have pre-deductible coverage for medicine they have been identified as needing, says Lonny Reisman, CEO of ActiveHealth Management, a disease management company owned by Aetna.

    “We have the capacity to identify what is essential at the individual member level, and those essential therapies ought to be offered by bypassing the deductible,” he says.

    Making such a change universal would go a long way toward countering the criticism that high-deductible plans with HSAs help the healthy and rich save for retirement, but not the sick and poor, who are more likely to use the money for current health care needs.

Struggling to save
    If the therapies and doctor visits that are required to manage diabetes were covered pre-deductible, Al Meginniss, the director of a substance abuse program with Lutheran Social Services of Illinois, would save about $1,100 every year. That’s about half his $2,200 family deductible. The social service organization, which employs about 2,000 people, switched to a high-deductible plan with an HSA in July 2005. Meginniss prefers having a deductible and saving on the premiums that get deducted from his paycheck.

    Even if Meginniss saved all he could under the current law, it still might not be enough to retire comfortably. If he saved the maximum amount annually—$2,850—and earned, for example, 7 percent interest, he would still save only $155,000 in 20 years.

    Estimates of how much employees will need to pay for retiree health care costs vary and depend largely on circumstance. Fidelity Investments estimates that a couple retiring today would need $215,000 to pay for health care not covered by Medicare. The Employee Benefits Research Institute puts that number higher, at $295,000. In twenty years, however, that number is likely to be much higher if health care costs continue to grow at twice the rate of inflation.

    Meginniss, 56, stoically accepts the fact that he will probably not be able to build up a big nest egg for retiree health care. “I think at this point in my life it’s more of a break-even proposition,” he says.

    Without the high-deductible health plan, Meginniss’ employer probably wouldn’t have been able to offer health benefits, he says. The switch has taught him to be a better health care consumer.

    Not long ago, he went to see a doctor for an ache in his knee. After spending thousands of dollars on doctor visits, tests and specialized injections, he got tired of wasting his money. When his doctor suggested physical therapy, Meginniss got a second opinion from a doctor who told him to try an over-the-counter pain medication. Ever since, he’s been taking Aleve, the nonprescription anti-
inflammatory pain medication.

    “Before I might have gone along with the ride and not even question it,” he says. “But since this is my money, it made me look at it and say, ‘What am I going to do here?’ ”

Workforce Management, April 9, 2007, p. 26-30 — Subscribe Now!

In an era when health care is increasingly being tailored to the individual, benefit managers are developing ways to tie medical co-pays to the clinical circumstances of patients.

    Researchers at the University of Michigan are studying whether employers that structure co-pays based on the medical needs of employees, rather than on the cost of a drug, increase the appropriate use of prescriptions that may, in the long run, keep people healthy.

    A. Mark Fendrick, co-director of the School of Public Health’s Center for Value-Based Insurance Design, believes that so-called value-based insurance design could address two scourges of the health care system: overuse and underuse of prescription drugs. The goal, Fendrick says, is to get more value out of a company’s health care dollars by making sure people get the drugs they need. Meanwhile those for whom a drug is of minimal medical benefit would pay higher co-pays to get it.

    “The reason we provide health benefits is not to have zero net costs,” Fendrick says. “If you want to save money, don’t cover people.”

    Fendrick, who is also a professor of internal medicine in the School of Public Health, advocates instead what he calls “fiscally responsible, clinically sensitive” benefits design.

    Most employers use a one-size-fits-all benefit design that focuses exclusively on reducing costs, such as prescription drug costs, by increasing employee co-pays.

    But, as Fendrick says, “As co-pays go up, utilization goes down.”

    Fendrick calls this the low-lying fruit of benefit design because increased co-pays are usually one-time savings that do little to slow the long-term upward march of drug costs.

    While raising co-pays can reduce the inappropriate use of drugs, it can also cause people to stop taking prescriptions that are needed to prevent a more expensive illness. Benefits should be “clinically sensitive” to the medical needs of patients.

    For example, in a value-based health insurance design, co-pays for beta blockers would vary depending on what the drug was used to treat. The cost of the drug would be reduced for people with high blood pressure who have suffered heart attacks. Co-pays would be higher for people using it as an anti-anxiety medicine, a condition for which the drug is approved. Preventing heart attacks from recurring, in essence saving someone’s life, is of greater value, both in medical and economic terms, than using a beta blocker to treat anxiety. Its use, therefore, should be encouraged by lowering co-pays.

    “These are not across-the-board co-pays,” Fendrick says. “These are co-pays based on value.”

    Some employers have for several years used a value-based co-pay design for medicines that treat certain chronic conditions. In 1997, the City of Asheville, North Carolina, began offering employees with chronic illness free medicine if they adhere to a pharmacist-run disease management program. In 2002, Pitney Bowes, in Stamford, Connecticut, reduced the co-pays for drugs that treat asthma, diabetes and hypertension.

    After collecting three years’ worth of data on how the co-pay designs lower costs and increase utilization, Pitney Bowes decided this year to give free diabetes drugs and statins—the chemical agents that lower cholesterol levels in people with cardiovascular disease—to employees who have been to the emergency room for a heart problem.

    Drugs that cost employees about $2 for a 30-day refill now include anti-seizure medications, all drugs to treat osteoporosis and secondary breast cancer, and prenatal vitamins, says Jack Mahoney, corporate medical director at Pitney Bowes.

    “I know we are doing well and people are talking, ‘Do you know you can get your statins for free?’ So people understand it,” Mahoney says.

    In January, Fendrick, Allison B. Rosen, an assistant professor at the University of Michigan’s division of general medicine, and Michael E. Chernew, a professor of health care policy at Harvard University, outlined their case for value-based insurance design in an online article in the journal Health Affairs.

    The authors added however that some employers might be hesitant to adopt value-based insurance design for a number of reasons. Drug costs may spike as a result of increased utilization; an initial investment would be needed to implement the new benefit design; and there was also concern that employees who were not eligible for reductions in co-pays would feel slighted.

    “We were concerned about employees with others diseases saying, ‘What about me?’ ” Rosen says. “But we haven’t heard that at all.”

    Both Pitney Bowes and the city of Asheville say they have demonstrated cost savings and improved health outcomes of their employees. Fendrick and his co-authors plan to publish later this year an analysis of the impact of value-based insurance design on utilization rates and health care costs.

    Another employer, Marriott, has worked with ActiveHealth Management, a health data company that is a subsidiary of Aetna, to design its own value-based benefit design. ActiveHealth analyzed patient claims data in order to selectively reduce co-pays on certain drugs for certain patients who had chronic conditions, says ActiveHealth CEO Lonny Reisman.

    Jill Berger, vice president for Marriott’s health and welfare plan, says out-of-pocket costs for eligible employees went down 27 percent on targeted brand-name drugs and 65 percent on eligible generic drugs.

    “Adherence increased, which is exactly what we wanted to see,” Berger says.

    Marriott expects its drug costs to go up, but the company is hoping that hospitalization costs will plummet.

    Berger says one of the challenges in implementing the new benefit design was getting the health plans to overcome the “administrative challenges” around selectively reducing co-pays.

    Nonetheless, Marriott, believing that by doing the right thing it will save money in the long run, is moving ahead with a plan to reduce co-pays for visits to doctors who treat an employee’s chronic illnesses.