Case Study: Bending the Cost Curve – How Safeway Does It
Originally Published in RMP Advisor, September 2009Supermarket chain Safeway is held up by President Obama and others as the model for controlling healthcare costs by focusing attention on wellness programs and preventive care. How does Safeway do it? Safeway takes a comprehensive approach, involving corporate commitment, changes in plan design, and financial incentives that reward healthy behavior. Let’s take a look at each of these critical success factors to Safeway’s approach.
Corporate Commitment
According to Safeway CEO Steven A. Burd, as reported in the Kaiser Daily Health Policy Report, the company realized that “50[%] to 60% of all healthcare costs are driven by behavior. If you design a healthcare plan that rewards good behavior, you will drive costs down.” So Safeway established a Healthy Measures program—a confidential and voluntary program that promotes employees’ health and wellness. This commitment to healthy lifestyles is the foundation that underlies Safeway’s success. It pays off financially because a provision of the 1996 Health Insurance Portability and Accountability Act (HIPAA) permits employers to differentiate premium contributions based on behaviors.
Changes in Plan Design
According to the Kaiser Report, Safeway incorporated changes in the design of its non-union benefit package beginning in January 2006 that contained the following elements:
- a $2,000 deductible and limits on out-of-pocket spending of $3,000 for family coverage.
- a company contribution of $1,000 to each employee’s health reimbursement account (HRA) to partially offset out-of-pocket costs.
- rollover of unused funds in the HRA so they are available for use in the next year.
- 100% coverage of preventive services appropriate to the beneficiary’s age group.
- 24-hour nurse hotline to help beneficiaries manage chronic conditions and other concerns.
The theory is that in this type of “consumer-driven” health plan, beneficiaries who live healthy lifestyles (e.g., not smoking, eating well, exercising) will spend less money from their HRA each year and build a financial cushion for future needs.
Financial Incentives Rewarding Healthy Behavior
In order to translate Safeway’s commitment into policies that change behavior, the company established premium differentials for employees based on healthy lifestyle measures. Safeway currently focuses on tobacco usage, healthy weight, blood pressure, and cholesterol levels to establish premium “rewards.” Employees are tested based on pre-established criteria for each of the four measures and get discounts on the premium for each test they pass. For individuals who pass all four tests, annual premiums are reduced $780 ($1,560 for families). Individuals who fail one or more tests can be tested again in 12 months, but the focus is on helping employees succeed. To ensure confidentiality, data on the tests is collected by outside parties and personal information is not shared with company management.
The Results for Safeway
Safeway CEO Burd, writing in The Wall Street Journal in June 2009, reports that Safeway’s results have been remarkable. In the 4 years since taking this new approach, “We have kept our per capita healthcare costs flat (that includes both the employee and the employer portion), while most American companies’ costs have increased 38% over the same 4 years.” Are there any business owners who would not welcome the same results Safeway achieved?
Implications for Health Reform
Safeway has turned down its healthcare cost curve – and most likely achieved improvements in workers’ health status and productivity at the same time. The President argues that the Safeway example should be emulated in the public sector and by others in the business community. Yet some of the proposals coming from Congress discourage or prohibit the types of financial incentives Safeway uses, including high-deductible plans with underlying personal spending accounts (healthcare spending accounts [HSAs] or HRAs). Let’s hope that this is an oversight and that any changes in public policy coming from Washington support the lessons of Safeway. The goal of health reform should be to eliminate barriers to the Safeway approach and to encourage others to follow its lead.