Safeway uses incentives and transparency to improve employee health

In this interview on “The Business Case for Health 2.0,” Ken Shachmut,
Senior VP Strategic Initiatives, Health Initiatives, and Health
Re-engineering at Safeway, shares is thoughts on some of the highly
impressive results that the company has obtained by introducing market-based
health plans.

SS: Ken, thanks for making time today. Tell me a little about your background?

KS: I have been active as an executive and
management consultant for over 30 years. I graduated from Princeton in
Engineering and later obtained my MBA from Stanford. In consulting, I
worked first with McKinsey & Company,
later at Booz Allen Hamilton, and for awhile independently.  I had done
some consulting for Safeway. I later joined Safeway and have been there
the last 15 years in various capacities.

Due to my consulting background and analytical focus, I am
frequently asked to look at new challenges and opportunities for the
organization. As health care costs continued to rise, we started
looking at ways that we could engage our employees or work with the
unions to control costs. The process has been highly successful, and we
now have broad participation in “market-based health care” (MBHC) plans
– starting with our non-union population and evolving into our union
plans currently. In consequence, our employees are now much more
actively involved in their health care and are making better choices
that improve their health. As a result of our learning and success, we
have helped to create the Coalition to Advance Health Care Reform
(CAHR) which is led by our CEO Steve Burd. CAHR now has over 60
companies as members.

SS: You have an interesting title, can you share with us some of the challenges that led to the work you are doing now?

KS: Over the first half of this decade Safeway’s
healthcare expenses were rising at double-digit rates.  The situation
was not sustainable, and we had to do something.  I was asked to review
the situation, and develop solutions.  I formed our Health Initiatives
Task Force (HITF) to undertake the work – which we accomplished in 90
days: situation to solution.

Our response was to move to MBHC. (We didn’t feel like
we could call it consumer directed, because we didn’t really see a
consumer market as we would typically define it within healthcare). Our
basic premise was that if people were given responsibility for their
decisions, and there was transparency to the financial consequences to
those decision (both good and bad, mind you!), that they would choose
to maximize both their health and their financial benefit. Since we had
more flexibility with our non-union employees, we introduced these
ideas to the non-union population first in 2006. We terminated many of
our traditional PPO and HMO plans and replaced them with our MBHC plan.
The results were nearly immediate and dramatic. We had hoped to slow
cost growth, perhaps even flat-line costs for a short time.  In fact we
reduced all-in per capita healthcare spending 13%.  And we shared the
saving disproportionately with our employees – their expenses were cut
by 25% or more.  By sharing these results with our union leaders we now
offer some MBHC elements in union-bargained plans in several key
geographies.  These new plans introduce mutual benefits – by
controlling costs, improving outcomes, and helping to leave more money
into our employees’ pockets through encouraging healthy choices.

SS: What exactly did you guys introduce? How did you measure the results?

KS: We started by encouraging everyone (employees
and spouses) to take a health risk assessment (with a substantial
reward) – to establish a baseline of health for the employee and
his/her physician while also helping individuals realize what specific
areas they could work on that would improve health status and help
reduce their costs. The plan includes a Safeway-funded HRA, followed by
an employee contribution, and then 80/20 cost sharing up to an
out-of-pocket maximum.  We also cover the full cost of all preventive
care, offer a full range of care management services, and give free
access to our Fitness Center and deeply discounted gym memberships
around the country.

Since introducing the plan, we have steadily improved it – adding
more benefits and asking for increasing accountability and involvement
to receive lowest possible premiums.  For 2009 we are introducing
Healthy Measures, which looks at four key health indicators – weight,
tobacco, blood pressure, and cholesterol.   On a voluntary basis we
requested that our employees get tested / measured on these indicators.
We then built a benefits package that had premium differentials based
on your performance. People who passed the metrics get the benefit of a
lower premium right away – and those who did not hit the metric the
first time will have the incremental premium refunded to them if they
do hit the metrics a year later. So, everyone can earn the lowest
possible premiums for 2009 if they take the voluntary measurements –
either right away, or within a year through a rebate of the increment.

I want to be clear – we were adamant about designing this program to
cover only those things for which our employees had control and which
were clearly behavioral in nature. We do not differentiate for
genetics, and we did everything prospectively and transparently so that
everyone had equal opportunity to improve their behaviors.  And, where
there are special circumstances documented by a physician, we authorize

We measure results in terms of program participation, by the
decrease in costs and trends, and by the overall health of our
employees.  76% of our eligible employees signed up for Healthy
Measures.  Depending on the metric, 70-85% of those opting in passed
the metric and so earned the lowest premiums for 2009.  The remaining
15-30% will earn the differential rebate a year later, if they pass the
metrics during next year’s measurement cycle.  It’s all up to the
individual.  When the individual modifies behavior and improves health
status, then he/she wins – personally in terms of better health, and
financially with a sizable rebate.

SS: What has been the uptake to date?

KS: We have over 70% of our non-union employees
(30,000) and about 30% of our Union (170,000) employees plans that
include some market-based elements. We have shared our results from the
beginning with our union workers by providing summary results to key
leaders. The response has been very positive as they have as much a
reason to ensure that their members are healthy as we do. We continue
to work with our union leaders to adopt MBHC more fully and more
pervasively over time.

SS: Everyone knows how hard behavior change really is – what incentives matter in promoting new and more health behaviors?

KS: While the primary objective is to improve
people’s health status, we all know that just telling people to do the
right thing is not effective.  After all, if “just telling” were
sufficient, we would not have over 30% obesity today. We believe the
best motivator is likely to be the wallet. Cash truly has been king in
our program in the form of differential premiums. Our average
difference under Healthy Measures is about $800 per year – for the
employee and spouse, so almost $1,600 for a family. This is a
meaningful amount of money.  The fact that you can earn the discount
immediately when you meet the health metrics, or that you can earn the
rebate with better performance next year, really levels the playing
field for all.

To complement our program of incentives, we reinforce the message of
good health through a holistic approach and mutually-reinforcing
programs available to all employees and spouses – access to the Fitness
Center, discounted gym memberships, care management programs, health
and wellness programs, information seminars to employees, and other
related itms..

SS: How did Safeway utilize Health 2.0 tools to accomplish these cost savings?

KS: I have got to be honest – I did not know much
about Health 2.0 until recently. However, Safeway had already been
using one of Health 2.0’s poster children, Destination Rx,
to help us achieve some impressive savings. Most of our program has
been programs, information, behavior change, and incentives. We have
not really done too much with technology so far, believing real change
in this space requires behavior change, and behavior change can be best
encouraged with incentives. However, we have learned how technology can
surface some of the motivators of behavior change, and in our case,
mostly related to financial issues.

For example, since Safeway covers the full cost of preventive care,
we look for ways of ensuring that the spending is prudent. We found the
cost for a colonoscopy within a 30 mile radius of our headquarters
building ranges from under $1,000 to almost $6,000 – without, as far as
we can discern, any difference in outcomes or quality. Therefore, we
have started to set our reimbursements rates at something reasonable
for a colonoscopy . . . lets say $1,500 for the sake of argument today
. . .  with any remainder coming from the employee.  This clearly
motivates employees to do a little research on colonoscopy providers
(which we make easy for the employee), since any increment over the
threshold comes completely out of the employee’s pocket, and is not
eligible for application against the out-of-pocket limit.  With this
approach we can begin to drive people to the health care organizations
who provide the best outcomes for the best price (definition of health
care value). Beyond just price, we are working with CIGNA, as our
admininstrator, to start to incorporate the next level of outcomes data
that would help make this even more impactful.

We look forward to the day when we get to those famous four quadrant
charts that help us truly answer who is a good provider (price,
outcome, satisfaction, etc).  Healthcare is a complex topic and there
is no one “silver bullet” – but full transparency on cost and quality
comes close.  Technology tools move us towards more transparency – very
important for the individual, an employer, and the nation.  And
ultimately for the provider as well.

SS: Can you further describe Destination Rx’s role in some of these initiatives?

KS: Destination Rx helped Safeway to embrace and
implement therapeutic equivalency to most effectively allocate our
health care resources. They had developed the concept and supporting
technology, which was operationalized and adopted broadly for the
Medicare population through CMS.  Acknowledging DRx’s solid leadership
and strong tool set, we asked them to run a full analysis on our
pharmacy files. DRx helped us assess the positive financial
implications for Safeway and our employees when members switch from an
expensive brand drug to a much less costly, therapeutically equivalent
generic.  Using DRx’s technology, we redesigned our plan to incorporate
pharmacy therapeutic equivalency (RxTE) and thereby deliver superior
value. We now have RxTE in place for 11 major chronic drug categories.
The results are dramatic.

Destination Rx’s ability to aggregate the body of evidence
(scientific and financial), provide compelling analysis (clinical and
financial), and then to provide convincing advice on the benefits
enabled us to move forward. The have a host of other tools and
technology that we look forward to evaluating as part of our ongoing

SS: Safeway as a large employer has clearly led out in the
Health Reform area – what do you see as the big trends or your big
hopes for a reformed health care future?

KS: The employer based insurance system that we
have inherited is an accident of history from the WWII era. There are
now strongly entrenched interests that will seek to preserve the status
quo, and change will only happen with constant pressure over time
(political, social, and cultural). So, we have chosen to work within
the current paradigm, focusing on ways to improve the system. We have
found, and would encourage other employers to consider evaluating for
themselves, that we have made a dramatic impact in our company by just
injecting market mechanisms into current offerings right now. There is
no need to wait for government action . . . we are seeing results
today.  Other than culture and / or inertia, there is no reason why all
companies and organizations – union trusts, non-profits, etc. – cannot
achieve similar results.

We at Safeway believe that meaningful healthcare reform should be
based on five basic principles – as described by the Coalition to
Advance Healthcare Reform (CAHR):

  • Market-based healthcare system – incorporating full transparency on quality and cost
  • Universal coverage with individual responsibility – every American should be in the system; there should be no “uninsured”
  • Financial assistance for the low-income – so they can afford to be in the system
  • Healthier behavior and incentives – to make the “choice to act healthy” a financially rewarding one for Americans
  • Equal tax treatment – everyone, whether employed or self-employed, should be able to pay for healthcare expenses with pre-tax dollars

We have done the math on this concept.  When the entire nation
addresses healthcare in a way similar to our approach at Safeway, there
will be enormous savings – in both the public and private sectors.  The
potential public sector savings are large enough to fully fund the
subsidy required for low-income individuals, and to bring all the 47
million currently uninsured Americans into a health insurance program.
It is one of our objectives at Safeway to help show the way.  When
successful, we hope others will say, “We have learned through the
Safeway experience that embracing consumerism and putting people in
charge and more accountable for their health can make immediate
improvements in cost and outcomes.”

SS: Wow . . . remind me to hire some engineers for my next business venture. Thanks again Ken for your time.