S~MNzGY LESSONS FOR SMALL BUSINESS: INCENTIVE HEALTH CARE AND RISK RATING PRACTICES Suzanne Milburn State of Kansas Ray D. Siehndel Washburn Umversity Joe Singer University of Missouri-Kansas City ABSTRACT As the healrh care sysrem reform debare continues, the central challenge of bringing nearly 38 million umttsured American worl'ers under a ttuattty healtlt care plan remains the goal. Attotlter ob)ecttve tlmt retttat'ns clear is thar the plan to be implemented will follotv the employerbased model whiclt Americans'mp(o&ers have crafted for over fifty years. Small business owners will be mandated to provide ltealth insurance ro all workers, inchrding those who work part tinte. This paper examines the health cttre incentive measures and risk rett'ng practices perceived to be effective cost control meclumisms for small business firms, Conclusirms concerning a well-tlesigned incentive program are offered tvithin the contert r&f the Americans With Dtsabiliries Act. INTRODUCTION Large double-digit annual increases in health care costs have taken place over the last tcn to fifteen years resulting in proportional, profit-draining expenditures by nearly all American businesses (Hurri ingcr, 1985; Vickery, 1994). Health care expenditures in 1985 cost employers an average of 1,724 per employee. U.S, employers now spend an average of $3,573 per worker to purchase health insurance and it is predicted that this ftgure will exceed $4,800 by the end of 1995 (Nations Business. 1992). Forecasters have observed that "If current laws and practices continue, health expenditures in thc United States will reach $ 1.7 trillion by the year 2000, an amount equal to 18.1 percent of the nation's gross domesttc product (GDP). By the year 2030, as America's baby boomers enter their 70s and 80s, health spending will top $ 16 tnllion, or 32 percent of GDP" (Burner, 1992). As U.S. companies continue to face ever greater competitive challenges from tntemational markets and uncertain health system reform, business owners arc I'ocusing more attention on containing health care costs. Small business cmpfoycrs are studying and implementing a range of strategies to control the rising health costs (Vaughan and Reed, 1992). The cost-control strategies typically adopted address the supply side of the medical econotntc equation and result in "bene(it take-aways" from employees (William, 1992). These include lttnitations on access to providers, pre-hospitalization certtfication, mandatory second 97 opinion, concurrent utilization review Iuld cost shifting through higher deductibles for employees. However, health promotion is a cost containment stnatcgy that address thc demand side ol'hc. c(ist cqU<ion. Health promotion is broadly def'ined as "any combination of'ducational, organizati(inal, economic and cnvironmcntal supporls I'or behavior c&mducivc to health" (Green and Johnson, 1983). "Contnlry lo other reports on cost managcmcnt initiatives, studies show th,'u health promotion is perccivcd hy mnployees as a valuable hcncl'it and typically has very lbw of thc negative;lssociations of other cost control strategies (Pmwkovcr. 1989). In addition to a warm reception hy employccs, studies show promising results on thc cc&momic impact ol'orp&iratehealth promotion programs (Warner, 1988). COST CONTROL MEASl)RES Ovm'he lust several years, a I'cw small business firms have;itteinp&c&l to Icveragc then health promotion stratcgics by implcmentin ~ programs with I'UIJO(.'hll inccnllvcs (aml disincentivcs) to motivate their employees to change their "unhcaltf)y" lil'cstyle habits ainl maintain good health habits (Muchnick-Baku, 1992). These inccntivc programs target risky employee health hchaviois that c&iukf potentially cnd up costing boih thc owner and cmployce nloncv. Thc practice of requiring employees with high risk behaviors to shoulder a greater sharc ol'he&i healih care costs has bccomc I'nown as "risk rating". Risk i ating can hc applied in the I'onn of dilTcrential premium contributions, copayments, dillcrcntial dcductihlcs, cost sharing structures or other benefit cnhanc(nncnts hrcsed upon an individual's m&idi1'iablc health risk chaiacteristics, (Chapman, 1992). Specific. cxamplcs of'tnall business risk-rating strategies include insurance discounts or su&Charges, cash rcbates or awards I'or meeting individual or group Itcalth goals, contributinns to an employcc's health (sire spending account and preadmission rcvicws, second opinion options. thc addition or subtraction of vacation days (Vaughan and Reed, 1992). Sonic conlpanlcs ch(nisc lo i)dopt only onc or two ol'hcs« stratcgics while other companies intcgratc all of &bein into onc plan. Trends in Risk Ra&in ~ Soli&if business tnsU&c&'s I'cpoi't &hilt anunlg clicnl lirms, 12 percent cithcr OITcr a discoUU& ol'nip(isc J sUI'chal'gc (ml clnploycc contributions to lil'e or health insUI"ulcc plans based upon ccitain hchuviors (Woolsey, 1992). In addition, f) pcl'cent phul lo;Idopl soirlc type of'inancial incentives over the next two years, and another 19 percent arc considci ing it. Thcrc i» lit(lc published data documenting thc outcomes of risk raling by small business I'lrms, hul preliminary data I'rom several business insurcrs with cstablishcd small business risk rated health insurance progrmns indicate that thc cost savings may hc quite I'avorablc (Muchnick-Baku, 1992). The Adolph Coors Company estimated an average annual medical cost reduction of'$150 per "at-risk" employcc three years af'tcr their risk-rated program was inlroduccd, Other firms which impl(nncnted health incentive plans in the mid 8(ys, rcport 98 cxpenencing a five percent increase in thc cost of their health care plan since 1987 compared to 20 pcrccnt &ncrcascs experienced by non-incent&ve plan employers (Muchnick-Baku, 1992) The Foldcraft Company cited less I'ormal results I'rom the implementation of their program in 1990 but states that the "donut index" had decreased signil'&cantly. That &s the number of donuts ordered as an incentive for injury I'ree work weeks was reduced by half and the "I'ruit mdex'ncreased proportionately when a health promot&on and risk rating incentive program was launched (Muchmck-Baku, 1992). Reasons for Risk Ratin Fscalating health care costs arc thc main reason that small business firms arc exploring additional cost containmcni strategies. A number of reports cstabl&sh a clear link between carta&n health characterist&cs and health care costs (Brink. 1987 and Ycn. ct. al, 1991). These characteristics, or "risk I'actors". arc directly linked to the behaviors an individual voluntarily choose to adopt, such as exercise, seat bcl& usc, smoking and alciihol consumpt&on (Golaszewski, 1992). A highly regarded 1987 study of Control Oata employees shows a clear sc&cntil'ic association between the prescncc ol'specil'ic nsk factors and health care costs. This study concluded that a signil'icant diffcicncc exists in the utilization and cost of medical care by health status. Generally, high-risk persons utilize morc medical care than other persons and generate higher claim costs (Brink, 1987). As a result busmess insurers and small business employers have begun to define employees with "high risk'&festyles or health status as I'inancially burdensome and have structured their health plans to ensure that these employees will pay more I'or their projected expenditures. In addition to cost contamment, other reasons oltcn cited for implcmcnt&ng risk- rated health insurance and benel'it inccntivc programs are: I) to protect or improv« thc health ol individual employees, 2) to beucr serve customers and to protect or improve the health of'he entire group, and 3) to fairly distnbute thc costs associated with risk behavior (Priestcr, 1992) Of thcsc reasons, cosi containment and employee health improvcmcnt are ihc n&ost frcttuently cited re&usi&ns for implementing risk-raiing strategies in the small I'irm. Small Business Work lace Rece tion As with most ncw ideas, risk rat&ng has rcce&vcd mixed rcv&ews I'rom cmploycrs and employees. It has been cmbraccd by new-agc employees as a creative and el'I'ective strategy I'or motivating healthier behaviors and distributing health care costs more cttuitably among the most likely users. However, risk rating has also bccn severely critic&zed I'r discriminating against vicums of poor health or unfortunate genetic inheritance. These employees Iccl risk rating unfairly shifts costs to employees on the basis of insulTicient research, and some I'eel it is a "deliberate rupture of the health insurance contract" (Priester, 1992). 99 SMALL BUSINESS RISK-RATING: THE PROS ANI) CONS Cost Containment In considering risk rating for cost containment purposes, there is convincing cvidcncc that risky lifestylcs and unhealthy behaviors do indeed result in higher health care costs. For example, the State ol'Kansas cinnparcd I'or three years the medical claims ol'smokers arid non- snu&kcrs. The study showed that smokers incurred 33 percent morc hospital admissions than non-smokers, also, smokers avenigcd 41 percent morc days in thc hospital than non-smokers. And smokers hail total average medical claims that were approximately $ 300 a year higher (Penner, 1992). In addition to smoking, other lil'estyle habits imp;ict health care costs as well. Onc study I'ound that persons whi& d&d not excrcisc had 114 pcrccnt higher non-maternity medical claims costs, used 30 pcrccnt more hospital days. and werc 41 pcrccnt morc likely to have annual claims ol'orc than $5,000 than those who modcratcly excrciscd, (c.g.. the c&tui valent of climbing 15 (lights ol'stairs or walking 1.5 miles thrcc or moiu times a wcck) (Brink, 1987). Thcrc arc several snags in the cost contaimncnt argument which small business employers shi&uld hc aware of in their examination ot'risk rating. One important consideration is thc extra (invcstmcnt) cost ol'conductmg and maintaining a risk rating program. If'hc cost of thc incentives needed to stimulate and vcril'y thc behavior change is grcatcr than thc savings I'rom a diffcrencc in lil'cstylc, then risk rating may actually add to thc total cost ol'ealth care (Kaclin, 1992). Additionally, thc costs of'supponing and maintaining healthy employee habits at thc worksite must be considered if a health prom&&&ion program is not already in place. These lifcstylc management programs might include weight management, smoking cessation or subsidixing healthier I'ood choices in vending machines. A pitl'all in the cost containmcnt argument is thc premise that thc "unprcvcntahlc claims" which would rcplacc thc "prcvcntable claims" would be cheapm, i.c., healthy lif'estylcs may merely change the causes ol'death and discase to those which are not prcventablc (Kaclin, 1992). These ncw causes ot'disc isc and death may gcncratc addi&&onal health care costs. Risk rating for small business f&rms may bc a justifiable 1&iotlcl of Inini&nixing and/or spreading health care costs. Howcvcr, thcrc &s much lusufication for not focusing solely upon cost col&tail&lrlcl&t o&&teel»cs ill thc cvaluati(mi of dsk tati&&g. Voluntariness lt is csscntial, cspccially mnong small bus&ness Iinns, to examine thc voluntary nature of'risk in thc assessment of'isk rating. Establishing the voluntary nature ol'sk is critical to thc dctcnnination ol'inancially fair incentives. If'ehavior is not under one's control, it would he difficult to be held accountable and even more difficult to enforce penalties for those behaviors. 100 Most believe that health behaviors are under one*s control, however, there are a large number of observers who believe that this is not thc case (Priester, 1992). Many argue that one's hereditary makeup is a major determinant of lilcstyle and that lil'estyles are really not freely chosen at all. For example, it could bc argued that alcoholism is a disease, not willfully chosen. Therefore, a cnterion ol'moderate alcohol consumption" may not be within the control of the alcoholic. Also, a recent study based on a survey of twins, links smoking with an individual's genetic history (Stone, 1993). These voluntary behaviors seem to be heavily impacted by social norms, family and work pressures, as well as economic and political environments (Eiscnberg, 1987). Others believe that behavior is virtually all self-determined with little or no influence I'rom any internal or external I'orces A case for this belief is made by pointing out that lifestyle behavior vanes widely I'rom individual to individual within I'amilies as well as within social classes (Veatch, 1980). Thus, if'ehavior is strictly hereditary. one would find the same lifestyle behavior among I'amilies and classes. Since this is not true, social I'actors and hereditary factors cannot by themselves explain lifestyle. Therefore, these health behaviors are at least partially free-will choices. Onc group ol'bclicvers in the I'ree-will concept. take the argument one step I'urther by casting a moral quality upon onc's lifcstylc decisions. As onc commcntaior writes, "Why spend money on a system which taxes thc virtuous to send the improvident to the hospital'" (Knowles. 1977) Similarly, another writes, "the concept of insurance is to spread risk from unknown causes, but not to subsidize the exorbitant costs of those who, through their own decisions, I'ail to take reasonably good care of themselves" (Williams, 1992) Another problem, especially in small groups of'mploycrs, is thc rewarding ol'ndividualswho meet certain standards but arc not practicing positive lif'estyle behaviors. For example. one employee may happen to have healthy genes and is allowed to rcccivc an incentive for meeting thc standard while doing nothing to contribute to their healthl'ul state. There is no definitive answer on whether hfestyle risks are freely chosen. However, it is certain that small business financial incentive health care programs should be based upon behaviors that are clearly voluntary with allowances for behaviors which may bc hereditary in nature. For this reason, "cafctcria plans" were considered relatively effective and "somewhat surprising given thc frequent complaint of'igh administrative costs for small employers adopting cal'eteria plans (Vaughan and Reed, 1992). ~Pb hilit rxi k A third issue to be considered by small business employers in evaluating the fairness ofrisk rating is the relationship between risk I'actors and probability ol'disease. A risk factor does not cause a condition to occur. Risk is not a causal condition, but is merely an indicator that one probability may be greater than another (Stone. 1981). Even genetic markers do not predict with certainty whether a person will in I'act develop thc disease or disorder in question. IOI lt is common I'or cpidcmiologist, physicians and insurance health care policy makers to treat an cstimatc o( the likelihood of something happening (a risk I'actor) to an individual as though it were a I'act (Terry, 1991). These estnnatcs or predictions become auributcs and tfualitics hy which employccs arc judged. For example, an employee with hyperlipiifemia is commonly treated as a "high-risk" employcc. This is because individuals with cholcstcrol levels above 200 arc considcrcd to have 10 times thc risk of an individual with levels below 200. Yct there arc individuals with extremely high cholesterol levels who will not dcvclop athcrosclcrosis or any other Ponn of'ascular disease over their lil'ctime. Many indivitluals with unhealthy lil'estyles habits will never contract thc discascs assigned to their risk category, or si&meonc thought not to bc at rial& who contracts thc disc;isc or illness, r..,..the nim-smoker who contracts lung cancer (Terry. 1991). Since it is impossible to predict the occurrence of a disease, it sccms unl'air to charge companies and individual» morc I'r health insurance when their actual health expcricncc may never warrant it. Risk Measurement and Standards Still another issue to cxtnnine in the scrutiny of'mall I'irm risl'ating practices is the mcasurrnnent and cstablishmcnt ol'small group risk standards and behaviors Who acts the standards by winch risk is mcasurcd'& Many pro(cssional health and medical associations diff&a in their screening guidelines and health rccommcmlations. For cx:implc, some health experts assert that obesity slu&uld not he considered a health nsk unless it is accompanied by other primary risk factors or is coupled with thc prcscncc of'related chronic health problems (Terry, 1992). Yct, many of'hc risk-&ated programs usc percent body I'at and weight-height ratios as part ol'he nsk I'onnula. Health standards arc c&mtinually being motlified as ncw data becomes availablc. The American Head Association has recently clcvatcd a scdcntary lif'cstylc I'rmn that of a secondary risk I'actor (or heart discase to that of' primary risk I'actor along with smoking, hypertension and clcvatcd cholcstcrol. Thcrcl'orc, lack of'cxcrcisc is now considered an cvcn greater risk lor heart disease th:m it has been in thc past. Given thc ahscncc of onc gcncrally accepted standard, it may hc unfair to hold cmployccs to a standard thai is not universally rccognixed or not supported by sufyicient cvitlcncc. Clixscly linked with thc need to sct I'air standards is thc nccd to tfuanti(y these standards. I.or cxtunple, using height-weight tables or body mass index is thc subject of'reat debate among expetts. Many argue that thcrc arc not measures ol'besity that are practical and rcliahlc enough to predict health risks. Spccif'ically, height-weight tables cannot provide inf'ormation about the percent ol'body I'at or where the I'at is stored. both of'hich arc thought to inllumice the development of chronic health problems. 102 LEGAL ISSUES AND CONSIDERATIONS Discrimination The question of possible discrimination is certainly a factor that must be examined by the small business owner in light of'hc recent Americans with Disabilities Act (ADA) and the current wave of corporate nsk ratinih The ADA is essentially designed to open up employmrnit opportunities for disabled Americans (Brislin, 1992 and Lewis, 1992). Onc potential concern is thc ability of smokers, obcsc individuals, or other high-nsk employees, to use the ADA to strike down adverse decisions regarding their employmcnt. Under the ADA, an employee (or prospective employee) is protected if they are rejected or treated diflerently because hc or she is "regarded as having an impairment" (Sugannan, 1992). An employcc who is treated differently bccausc of'mall business cmploycr fears that higher costs in the I'uture from health claims, absenteeism or turnover t'rom conditions brought about from a smoker or an overweight cmploycc may bc scen as having an impairment and protected by the Act (Branncn and Bcglcy, 1995). Most cxpctxs believe that it is still too soon to tell how the courts will treat thcsc types of problems. Some experts have suggested that in cnl'orcing the ADA, the EEOC will. in the early years, focus on those who arc clearly disabled now, and will tend to steer clear of'he "regarded as having a disability provision" (Sugarman, 1992) There is specific language m the ADA which may exempt certain insurance or health plan pricing practices that have actuarial validity. Thus, small business employers who might bc at nsk under the ADA I'or refusing to hire someone, may be able to charge that person a higher, risk-rclatcd premium. It is also possible that small business firms will avoid trouble il'hey offer lower rates to those with currmit healthy lifcstylcs habits, and those who arc participating in programs to try to decrcasc their risk lcvcls. Onc additional consideration would be a waiver or exemption I'or those people with disabilities who do not have "normal" par mieters, e.g., blood prcssure, weight, etc. (Brannen and Begley, 1995) Along with the ADA, Title Vll of the 1964 Civil Rights Act may also be invoked to prevent small business firms I'rom imposing risk rated health insurance premium charges on employees If, 1'or example, black employccs or oldm. cmployecs could show that differential premiums for smokers or non-smokcrs, or for those with high and normal blood pressure, have a disparate, impact on them, the use of these premium dil'fcrcntials mivhi consutute illegal cmploymcnt discrimination (Sugarman, 1992) ~privac Along with discrimination and the accompanying potential for legal difliculties, is the issue of privacy and risk rating. Employers who try to rcgulaic cmployecs ol'f-duty conduct inay be impinging upon the distinction between pnvate life and work life A variety of laws recently passed m 21 states prohibit cmploycrs from basing cmploymcnt-rclatcd decisions on a worker's off-duty behavior or lifestyle (Woolsey, 1994). 103 Critics of risk rating plans state that the fact that cenain lilbstyles increase or dccr&ntsc ltcalth care costs has nothing to do with how many widgcts (a worker) can turn out in onc hour. Thc Ibar is that small business (small group) cmploycrs &von't just draw tltc linc at the obvious, well-documented risks hut will encroach upon any health risk as I'air game. Woolsey writes, wOncc you start down that road of'egulating oflzduty conduct, you have almost a limitless supply ol'areas of discrimination: alcohol usc, red-meat dicta, cvcn recreational activities like hang gliding or mountain climbing." It is clear that much work will need to be done before there arc definitive answers to thc many questions regarding thc application of nsk rating plans in small husincsscs and thc potential I'or discrimination in thc I'acc ol'hc ADA and Title VII. It is obvious that slrltlll ltrms walk a I'inc linc between helping cmployccs attain bcttcr health and intcrfcring with their personal I'rccdom. In reducing health ccrc costs, small business owners must carefully select their standards and take gtcat care in thc design of small group risk rated programs to hc I'ail and avnid costly, time consuming legal problems. CONCLUSIONS Cotnpetitivc choices an&I trade-nlfs for small business lions today, clearly involve the ability to ol'I'cr cmployecs health insurance benefit plans. In an cra of double-digit annual incrcascs in health care cosnu thc fear ol'ot hctng able to alford nccde&l medical trcatmcnt (long the problem ol'hc uninsured) cont'ronts the currently insured small business owners and their cmployecs. A well-dcsigncd cost cmttainment inccntivc progr:mt can bc designed) to take into consideration thc many pros aml cons assoctated with a I;tir risk rating plan I'or small business &onployees. As morc small business insurers cxperimcnt with policy design and financial incentives of all types, additional knowledge will hc gained that may I'acilitatc &Icsigning thc best and I'aircst utilization of risk rating as a positive instrum«nt. Until morc research has been done, thc following rccomtnendati&&ns for small business owners and their cmployccs can scrvc as a uscf'ul starting point in thc designing a risk rating plan: I. Incentives should be habit-based rather than risk-based. To hc cf(Ective and lair, risk rating should emphasize only those behaviors over which an individual has uhimate control. Examples of these types of habits arc: scat belt usc, cxercisc, regular medical checkups, diet arul smoking. 2. Employees who are at risk hut arc attending classes or are actively engaged in reducing their risk through changing behavior should not he penalized I'or their current risk level. Adcquatc time should he allowed I'or employccs who arc wnrking on bchavi&tr change and risk reduction. 3. Program llexihility should allow gtr individual or special group considerations. Examples ol'his would be allowing pregnant wotnen a cenain length of time to return to original weight and physiological conditions hcfotc mccting standards, or creating special standards for handicapped or disabled individuals in terms of exercise and ccnain physiological parameters. I 04 4. Consideration should be given to the impact that risk standards may have on types of mdividuals within the firm. Care should bc taken so that discnminatory standards arc not set that will affect certain demographic groups in a disparate, manner. 5. In order to be safe and fair, incentive plans should reinforce long-term behavior change rather than inducing short-tenn behavior. getting realistic time frames for employees to meet certain rcquircments is highly recommended. For example, allowing short time frames within which employees must meet certain weight standards may lead employees to fast or use crash diets, either of which can have a severely negative effect on overall health. While on the surface meeting thc requirement of'he risk rating plan, the actual outcome may bc more costly to the individual and to the plan. Presently, little data is available supponing the fairness of small business attempts at risk rating plans. 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