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U.S. health care costs continue to outpace inflation, a recent report suggests companies could do a better job of containing costs if they fine-tuned the way they wielded their main weapon: sharing the cost of health benefits with employees.

The report, from the Center for Studying Health System Change (HSC), a non-partisan policy research organization, argues that cost-sharing that is not targeted correctly may be ineffective or could even backfire.

One possible pitfall: Employees who are strapped for cash may fail to get the care they need, resulting in more serious health problems that cost employers more money down the line.

The fact that a small portion of employees account for a large part of medical costs also limits the effectiveness of cost-sharing, HSC says, because financial incentives are weaker once employees have exceeded their deductible. The report also noted that current cost-sharing measures generally are not designed to encourage employees to select more efficient providers or more effective treatments.

Ha Tu, a senior health researcher at HSC and a co-author of the report, says the 25 experts interviewed for the report were most excited about two approaches to designing cost-sharing. One involves identifying the medical services that provide the most clinical value and the employees who would benefit from those services. This approach also entails reducing cost-sharing to encourage employees to use those services. Tu notes, though, that “the clinical knowledge base isn’t where it needs to be to make those differentiations.”

The second approach is to provide incentives for employees to use efficient providers. The networks of high-performance doctors currently identified by some insurers are a version of this approach, but such networks focus mostly on cost measures, rather than on quality, Tu says.

“The very widespread feeling is that these kinds of high-performance networks won’t take off until the quality measures are developed to the point where people have real confidence in them,” she says.

Another approach is to provide incentives to employees who participate in wellness programs. The report cited Johnson & Johnson’s 1995 offer of a $500 health insurance premium discount to employees who participated in such a program. That sent participation to 90 percent from 26 percent, although it has since tapered off from that 90 percent level.

Companies may shy away from wellness programs, however, when they compare the upfront cost with the amount of time it takes to see results, if only because the employee may be working for another company by that point, explained Glenn Melnick, director of the University of Southern California Center for Health Financing, Policy and Management. Melnick predicts that companies will focus on encouraging employees to become better health-care consumers rather than on wellness programs.

The HSC report says that innovation in the design of health plans is not that widespread. Companies want very clear evidence that an approach works before they adopt it, Tu says. “Companies are just very gun-shy of rolling out some expensive program and not seeing the payoff from it.”

The report also noted that the IRS regulations governing the health savings accounts (HSAs) used in conjunction with high-deductible health plans can limit innovation by companies. For example, the regulations do not allow companies to waive the deductible in high-deductible plans for care for an ongoing chronic condition, which limits a company’s ability to provide free drugs for employees with chronic conditions.

The report suggested making HSA regulations more flexible. For example, instead of mandating the same deductibles for all employees, the regulations could allow deductibles to vary according to employees’ incomes.

—Susan Kelly

Filed by Susan Kelly of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

A number of retirement plan sponsors are taking advantage of a little-known provision of the Pension Protection Act that allows them to automatically step up older employees’ 401(k) contributions to take advantage of the “catch-up” limit available to workers 50 and older.

The pension law, passed in August, permitted employers to automatically enroll employees into their 401(k) plans and step up their contribution rates on an annual basis. The legislation also allowed for companies to use specific types of funds as the default option in their plans.

Under 401(k) law that already was in place, employees can contribute $15,500 into their 401(k) plans annually, but employees 50 and older can put another $5,000 into their plans. The idea is to give these employees a chance to catch up on their retirement savings.

But few companies are seeing employees take advantage of this provision, says James Cornell, senior vice president of employer marketing at Fidelity Investments. On average, companies see a 9.8 percent adoption rate of the provision by employees, he says.

“Employers looked at their participant basis and saw that many of those employees approaching retirement weren’t going to be ready,” Cornell says.

In response to that scenario, Fidelity is conducting a pilot program with 25 employers, allowing them to offer “automatic catch-up,” he says. The employers participating in the pilot represent all com­pany sizes and are implementing the program differently, Cornell says. Some companies are automatically setting aside up to 10 percent of employees’ pay in their accounts, he says.

So far, the feedback has been positive, Cornell says. There were two main concerns expressed by employers. The first was how participants would react, which has not been an issue, he says. Companies were also concerned they’d be assuming more fiduciary risk by offering the auto catch-up provision.

“This gets a bit complicated and we urge employers to work with their consultants and in-house counsel,” he says. “But basically the PPA provides a safe harbor up to 10 percent,” meaning that most companies should be fine as long as the employee isn’t contributing more than 10 percent of his or her salary into the 401(k) plan, he says.

But a lot of employers may be hesitant to offer this kind of automatic program for fear of seeming too paternalistic, says Don Stone, president of Plan Sponsor Advisors, a Chicago-based advisory firm.

“Conceptually this makes sense. But my guess is that you won’t see a lot of plan sponsors choose it because they will say that anyone who is old enough and is already at the point of contributing and maxing out their normal contribution rates are able to make these kinds of decisions for themselves,” Stone says.

But a lot of companies have built a culture of looking after their employees, and this falls into that concept well, says Rick Meigs, president of 401khelpcenter.com.

“If plan sponsors do this, they just need to make sure they communicate really well and let employees know what’s going on,” he says.

Fidelity is evaluating the pilot program and will make a decision in the next several weeks about whether it will offer it to all plan sponsors, Cornell says.

—Jessica Marquez

Podcast: Interview with Arthur Wei, China Hewlett-Packard’s regional general manager of Northern China
Arthur Wei describes the challenges of recruiting and retaining top talent in China.

Podcast: Interview with Edward Tai, vice president of Hyatt International Hotels and Resorts for China and Taiwan
Edward Tai talks about how Hyatt’s long-term development plans for rising stars can go for naught in the country’s tight market for leadership talent. He also describes the market for top talent in China.

Podcast: Interview with Helen Tantau, senior partner with executive search firm Korn-Ferry International in Shanghai
Major talent management firms like Korn/Ferry International are doing brisk business in China. Helen Tantau, senior client partner with Shanghai Korn/Ferry Human Capital Consulting Company, talks about major changes in the market for business leaders in China during the past few years.

Podcast: Interview with Teresa Woodland, a Beijing-based independent consultant
Teresa Woodland is a Beijing-based consultant. She says firms in China are promoting people more quickly than they might in other parts of the world. But, she said, there are steps companies can take to ease the transitions.

Podcast: Interview with Guo Xin, managing director for Greater China for Mercer Human Resource Consulting
Guo Xin is managing director for Greater China for Mercer Human Resource Consulting. During an interview at Mercer’s Beijing offices, Guo says that leadership is critical for firms in China because the country’s vast potential market makes it a “hill to die for.”

Podcast: Interviews with Sandrine Zerbib, president Adidas for Greater China, and Angel Yu Adidas’ vice president of HR and administration for Greater China
Sandrine Zerbib, president of sports clothing firm Adidas for Greater China. During an interview at the company’s Shanghai offices, Zerbib talks about how fast growth in China makes the use of expatriate leaders critical. She also sees a new generation of Chinese leaders emerging. Angel Yu is Adidas’ vice president of HR and administration for Greater China. She describes the company’s system for assessing and developing leaders in China.

Podcast: Interview with Yang Bo-ning, director of corporate communications and public affairs for Motorola (China) Electronics Ltd.
Yang Boning, director of corporate communications and public affairs for Motorola (China) Electronics Ltd. Talks about how business in China is blending the best practices and cultural traditions of the east and West.

When it comes to worker training programs, the Bush administration takes with one hand and gives with another, creating a duality that draws both criticism and praise.

Policy aside, the key challenge for government is to convince corporate America that federal initiatives can be viable sources of talent.

In his fiscal year 2008 budget, President Bush seeks to cut job training programs by about $1 billion. He is proposing vouchers, or “career advancement accounts,” for displaced workers that would give them $3,000 annually for two years to spend on education and training.

The goal is to provide more flexibility and choice for more people than is currently allowed in the federal training structure, according to the administration.

“In the past, we’ve had duplicative systems that have arisen over time,” Labor Secretary Elaine Chao said at a press briefing in February. “I’m challenging the system to do better because people who are out of work are depending on us.”

The career accounts—as well as the Labor Department budget—would have to be approved by Congress. House hearings on the legislation that encompasses training programs, the Workforce Investment Act, may take place in late March or April.

The Senate approved workforce legislation last year, but the full Congress has not passed a bill that formally reauthorizes the 1998 law. For the past three years, Congress has appropriated money to programs established under the original legislation.

While Congress dallies, the administration approach to workforce training is taking fire. The Bush policy is misguided because it would cut funds and require individuals to find their own way through the training maze, according to Tom Kochan, co-director of the Institute for Work and Employment Research at the Massachusetts Institute of Technology.

A better idea, he says, is to link funding to industries and institutions that can leverage private-sector investment and give workers general skills that enable them to plug into existing job demand.

“These people have to be embedded in networks,” Kochan says. “We’re not investing [enough] and we’re not spending our money wisely on everything we know [that] works in employment and training programs.”

Like many other experts and practitioners, however, Kochan endorses the Workforce Innovation in Regional Economic Development Initiative, known by the acronym WIRED. The program is a major Labor Department effort to foster regional economic development by bringing together local government, business and academia to train workers for emerging industries. During the past year, WIRED has invested $260 million in 26 regions throughout the country.

Kochan advocates linking funding for community colleges and universities to their willingness to work with businesses and government.

“That is the kind of networks we need,” Kochan says. “We should be doing this in all our localities.”

Before the practice becomes ubiquitous, businesses have to look to the federal workforce system as a reliable supplier of talent—something that has not happened widely in part because government programs are perceived to be cumbersome and targeted at low-skill workers.

“To effectively engage employers, we need to be able to address their training and hiring needs at all levels and eliminate the bureaucracy they face when they try to access training programs,” says Julian Alssid, executive director of the Workforce Strategy Center.

With local workforce boards, politics sometimes goes along with the training. Appointed by local officials, they tend to protect their turf. For that reason, it would be impossible to merge boards from multiple counties, according to Ross Jackson, a research associate at the University of Memphis and a member of the National Association of Workforce Boards.

He says it’s too early to tell whether WIRED works, but he supports providing incentives for cooperation.

“That will work because economic development today is regional and employment is regional,” he says.

Companies, however, don’t care about local political machinations.

“All they want to know is that people are trained to their standards,” Alssid says.

One place where that is happening is in southeast Michigan. The regional Chamber of Commerce is encouraging auto manufacturers and suppliers to partner with community colleges and government agencies under a WIRED grant to spur economic revival.

Traditional workforce investment involves using federal money to hire a single training vendor. The WIRED prescription encourages teamwork.

“It has been very progressive,” says Jim Jacobs, director of the Center for Workforce Development and Policy at Macomb Community College in Warren, Michigan. “Everyone can win or play a role.”

Some of the biggest entities on the stage are community colleges. With their emphasis on adult education and connections to local business, they have become the primary source of training in a country that lacks a workforce strategy, Jacobs says.

“Community colleges are the national workforce institutions,” he says. “They are on the front lines.”

Local workforce boards also are trying to assert themselves in nurturing talent by demonstrating that they can save businesses money on recruiting and retention.

John Kraczkowski, director of business services for the Workforce Development Board of the Treasure Coast in Port St. Lucie, Florida, says that his organization is adept at plugging into local firms to determine their talent needs.

It won an innovation award from the National Association of Workforce Boards for putting a one-stop federal employment center on the premises of Aegis Communications Group, a local telemarketing firm that employs 700 people.

In the partnership, Aegis provides office space and a receptionist while the workforce system supplies an on-site career counselor and recruitment resources.

The arrangement saved Aegis $750,000 in recruiting costs in its first year of operation, according to Kraczkowski, while reducing turnover by half. The government center has reduced its cost per placement by 67 percent.

“Everyone’s won from it,” Kraczkowski says. “Workforce boards are excellent at having relationships with businesses in the community.”

On a wider playing field, creating similar kinds of business engagement is crucial for the WIRED program. The Labor Department wants the private sector to view cooperation with government and academia as an avenue for finding talent.

“All of us have been striving to expand and enhance the relevance of this system to the regional economy and the larger economy in globalization,” says Emily Stover DeRocco, assistant secretary of labor for employment and training.

Progress is being made, albeit sometimes slowly.

“For all of us, it’s been a journey of learning, which is continuing,” DeRocco says. “Reforms coupled with these investments can get us there.”

Mark Schoeff Jr.

A British law that allows shareholders a nonbinding vote on executive compensation has helped to curb excessive CEO pay and better link remuneration to performance, according to experts who testified Thursday, March 8, before a House committee.

The British practice, in place since 2003, is similar to one outlined in a bill introduced by House Financial Services Committee Chairman Barney Frank, D-Massachusetts. Frank’s measure was the centerpiece of the March 8 hearing.

Under Frank’s proposal, public companies would be required to give shareholders an annual nonbinding advisory vote on executive compensation plans. It also would ensure a nonbinding vote on a “golden parachute” package if one is awarded while the company is being sold.

In Britain, such an approach has been a success, according to Stephen Davis, a fellow at the Millstein Center for Corporate Governance and Performance at the Yale School of Management. Davis’ organization studied the U.K. system.

“Advisory votes on executive pay policies are rational, timely, road-tested and practical for use in the United States,” Davis testified before the House committee.

Shareholder voting on compensation has resulted in “taming the rate of increase, curbing opportunities for ‘pay for failure,’ and linking compensation dramatically closer to performance,” Davis says.

A representative of the U.S. business community, however, warned that shareholder voting could undermine corporate governance by fostering proxy wars and distracting directors from other critical responsibilities.

John Castellani, president of the Business Roundtable, says he favors improved disclosure of executive pay. But the level of compensation should be set by corporate boards.

A 2006 survey of the Business Roundtable’s membership found that 85 percent of company boards are composed of at least 80 percent independent directors, who are elected by shareholders and act on their behalf.

“Corporations were never designed to be democracies,” he says. “While shareholders own a corporation, they don’t run it.”

Davis argued that a nonbinding advisory vote provides “shareholders tools they need to act as real owners of the corporation.”

Shareholders are getting more information on CEO pay thanks to enhanced disclosure rules promulgated last year by the Securities Exchange Commission. But transparency alone is not sufficient, according to one witness.

Reforming pay structures “depends on information and the ability to respond,” says Nell Minow, editor of the Corporate Library, a governance watchdog organization. A mechanism like advisory voting enables shareholders to align salaries with performance.

A survey by Minow’s organization of 1,400 CEOs showed that their median total compensation was $13.51 million in fiscal year 2005, up 16 percent over 2004.

But Steven Kaplan, a professor at the University of Chicago Graduate School of Business, said most CEOs are not overpaid and are judged by their firms’ performance.

He said the median salary for the boss of an S&P 500 company with more than 20,000 workers was $8 million.

One problem, Kaplan says, is that the best corporate leaders are opting to ditch shareholder hassles for the riches of the private equity world. The Frank measure would be another straw on the camel’s back.

“On the margin, the bill would reduce the attractiveness of being a public-company CEO,” Kaplan says. “Good CEOs and CFOs say, ‘I’d rather be doing something else.’ ”

Enhancing a CEO’s career path isn’t as important as addressing the yawning disparity between executive compensation and pay for other workers, a situation that undermines confidence in the economy, says Rep. David Scott, D-Georgia.

“I am concerned that executive pay has become dangerously outsized,” he says.

The Frank bill is a good response. “This is a modest, common-sense approach to dealing with a very serious issue that is threatening the fabric of our economic system,” Scott says.

At the March 8 hearing, Republicans were skeptical about the bill. They voiced concerns about government trying to influence business decisions and worried that shareholder voting on executive compensation would lead to direct voting on other aspects of company operations.

Frank has scheduled a March 21 committee vote on the bill. That will provide another opportunity for Capitol Hill comment on executive salaries—an issue that’s building momentum, Minow says.

“It’s quite clear that there is a tremendous amount of support for doing something about CEO pay,” she says.

Doctors in medical clinics at employer work sites are three times more likely to get employees with chronic illnesses enrolled in disease management programs than the telephone counselors most programs rely on, a new study shows.

The findings, published last week in the Journal of Disease Management, give added weight to the growing interest by large employers in having primary care clinics in the workplace.

The study was conducted by CHD Meridian Healthcare, based in Chadds Ford, Pennsylvania, at a health clinic the company operates at a Goodyear Tire & Rubber Co. plant in Gadsden, Alabama. CHD Meridian identified 1,815 employees with diabetes, hypertension or coronary heart disease as being potential participants in a disease management pro- gram. Seventy-six percent of eligible patients who were encouraged during meetings with their doctor at work-site clinics enrolled in the disease management program, compared with an industry average of around 25 percent, says Raymond Fabius, president and chief medical officer of CHD Meridian Health­care and one of the study’s authors.

“Traditional disease management programs have depended on anonymous, albeit very well-meaning, nurse case managers making telephone calls to patients, often independent of their trusted clinicians,” Fabius says. “Our key finding showed the remarkable power that a trusted primary care clinician has on effecting behavior change.”

Employers have taken a renewed interest in disease management programs in hopes that by detecting and managing chronic illnesses they will improve the health of their employees and reduce long-term medical costs. Disease management companies use computer modeling programs and health risk assessments to identify at-risk patients. Most rely on over-the-phone counseling to enroll patients.

The study suggests that doctors at work-site clinics do a better job.

“When you place the trusted clinician in the workplace and you capture the majority of the covered population, it’s much easier to drive a wellness or disease management program because you [the employer] are only dealing with one doctor’s office,” Fabius says.

Doctors who are spread throughout the community often must divide their time among different patient populations, health insurance companies and various disease management programs.

Another issue is economics. Insurance companies pay doctors a fixed rate for each patient visit, regardless of whether the visit lasts five minutes or 50. Face-to-face counseling, often the most important way to change patient behavior, is the first thing to be sacrificed, doctors say.

But not every employer needs to build a work-site clinic to get those results, says Dexter Shurney, chief medical officer for Healthways, a disease management company based in Nashville, Tennessee. Shurney says Healthways enrolls 90 percent of eligible patients into disease management programs through its telephone counseling services.

“A number of models can work as long as you establish that level of trust,” Shur­ney says. “Companies need to think about leveraging the kinds of things they already have in place” before investing in a work-site clinic.

Fabius estimates a company would need 1,500 employees at one work site to support one physician’s practice.

—Jeremy Smerd