Prognosis: Negative

Rising health-care premiums have companies shifting costs, pushing "wellness," and punishing unhealthy behavior.

When CFO Tony Aukett went shopping for company health insurance last May, he paid careful attention to how each plan would treat employees. No, he wasn’t worried about whether the doctors knew what course of action to take for a given illness or injury. Rather, “I wanted to avoid the kind of plan that punishes the employees — for smoking, or for any other behavior,” says Aukett, CFO at Continental Paper Grading, a broker of waste paper. “We value them and we want them to stay.” By December, he had identified a plan that fits those requirements and cuts the company’s annual health-care spend by as much as 18 percent. But Aukett knows the situation will become more challenging. “This is probably a good stop-gap,” he says. “But I am very aware of what is coming down the pike, and as much as I want to avoid it, we may not have any choice.”

What Aukett would like to avoid, but may not be able to, is what one CFO calls the “penalty box” approach to health coverage. In recent years companies have discovered that they can reduce health-care costs by offering incentives for employees to take better care of themselves. The practice has become so widespread that companies such as Virgin HealthMiles, which is part of Sir Richard Branson’s Virgin Group, now offer a service that helps businesses measure employee fitness and come up with creative rewards for those who achieve specific exercise goals.

The problem with the rewarding-the-good approach has been that participation starts to drop off unless management keeps sweetening the pot — which, at some point, dangerously dilutes the return on investment. As a result, “some employers think they have gotten all they can get out of giving people incentives,” says Jerry Ripperger, national practice leader of consumer health for The Principal Financial Group. “To reach the next level, they need to try another approach.” That means good-bye carrot, hello stick: employees who do not make an effort to quit smoking, lose weight, or otherwise reduce their health risks pay for their decisions — often literally, through higher premiums.

A renewed sense of urgency regarding health-care costs is taking hold because such costs are expected to grow at an average 6.7 percent annual rate between now and 2017 (after rising 6.1 percent in 2007), according to the Centers for Medicare and Medicaid Services. As companies struggling with the dismal economy terminate 401(k) matches — not to mention employees — and take a host of other cost-cutting steps, CFOs are likely to take a harder look at health plans.

In a survey of 320 finance executives conducted late last year by CFO Research Services, more than 40 percent said they intend to reduce the company’s contribution to benefits in 2009. A staggering 82 percent expect to control costs by changing their health-care plans. In just one example of the kind of trade-offs finance chiefs are weighing, Guy Anthony, CFO of Quellan, a maker of specialized semiconductor chips, says that because the company had been fairly conservative on salary increases, it could afford to absorb the 8 percent increase in health-care costs. “We didn’t make a precise calculus, but we kept the health-care number in front of us when we did our calculations,” says Anthony. “We decided not to create angst by changing how much of the premium employees pay.”

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