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.

13 replies »

  1. Safe way brags about hiring the handicap. When one of their long term employees has a heart attack and temporary loss of memory they refuse to pay out benefits due him if he acted with in 30 days. Because of the loss of memory the employee was not able to act with in the 30 day period. Hence Safe way said to bad you did not act with in the 30 days so you are out of luck. Kind of hard to take after years and years of service.

  2. As a 25 year non-union employee of Safeway, I can tell
    you personally that all of this MBHC is just a pretty,
    politically correct way of shifting health care costs
    to employees. They say we get to make choices, when in fact, there is little choice to make. It’s more like,
    “give them an offer they can’t refuse” and they’ll
    make the “choice” that we want them to make.
    Take the cholesterol initiative. We get a discount
    for good cholesterol numbers. So, let’s say your
    cholesterol is up and your Dr. wants to put you on
    Lipitor, the number 1 top selling cholesterol drug in
    America, the one cholesterol drug approved to reduce
    the risk of heart attack. Guess what, it’s not covered
    on Safeway’s drug plan. This is because Direct Rx has
    decided that there are other generic alternatives that
    are just as effective. I don’t know what report they
    missed, but not all cholesterol lowering meds are the
    same. As a pharmacist, I can tell you that there are
    big differences that can have huge implications in an
    individual’s health care. To make your understand their
    thinking, I offer this example: an apple and an orange
    are both in the category of “fruit” and therefore are
    equivalent. Don’t be fooled. All of these “incentives”
    of MBHC are methods to shift the cost of healthcare to
    the employee. If Safeway would just return some of the money involved in funding all of these incentive programs back into paying for actual care, I know I would be better off financially.
    Safeway wants us to be better healthcare shoppers. Well
    get this. I am now considering taking insurance with
    my spouse, instead of Safeway. If I do, my RX coverage
    will have to switch, and I won’t be able to get my Rx’s
    filled at Safeway! Imagine that! A pharmacist employee
    at Safeway for 25 years, with a Rx bill over $4000 a
    year, will be getting his families prescriptions filled
    at CVS! If Safeway’s eye is only on the bottom line,
    then so is mine. When I switch health plans, they’ll
    save money, but the will have lost my business, my
    loyalty, and my good will. I hope they are happy with
    their decision

  3. This from an article in 2006: (http://seattletimes.nwsource.com/html/localnews/2002804112_walmart14m.html)
    “The reports showed that Safeway, with roughly the same number of employees in Washington state as Wal-Mart, had fewer than half as many workers on Medicaid or the state’s Basic Health Plan.”
    I would ask, has the new health plan reduced the number of people on Medicaid? And if prevention is key to the plan does Safeway give discounts to employees who purchase fresh fruit and vegetables and whole and organic foods instead of prepared foods?

  4. David – Valid points but the issue is that those minors are consenting adults. It is unforunate that they may have become addicted while minors but it is an impossible exercise to determine if a single store such as Wal-Mart or Safeway was responsible for their addiction. They were fined and policies were changed to address the problem. All you can do now is just enforce the policy as necessary.
    As for the cost estimates due to smoking, that is one flip side of the coin. My contention was that if someones dies at age 50-60 due to a smoking-related illness the cost of their lifetime healthcare costs will be much lower than if they had hadn’t smoked an achieved a normal lifespan of the average American male/female. I understand it is an incredibly cynical and unrealistic policy position but I was just pointing out the counterpoint. Devil’s advocate if you will.

  5. MG –
    Most of the people that started smoking started smoking and got addicted as minors (I think the number is about 90% of smokers) when stores such as Safeway (see article ref in my original post) were selling to them illegally. Most people want to quit smoking as adults and many have tried repeatedly to stop. Firms such as Safeway and Wal-Mart should not be filling their corporate coffers on the backs of people who got addicted as minors and who are trying to quit.
    For more info see: http://www.tobaccofreekids.org/research/
    BTW, Dr. Leonard Miller, retired, of UC Berkeley did a study in the 90’s that demonstrated of the 1993 nationwide health care budget, 12% went towards paying for health effects of smoking. For todays budget of $2.1 trillion that comes to $250 billion for 18 billion packs smoked or $13/pack which is being subsidized by taxpayers and people who buy products from firms that pay the smoker’s increased health care costs.

  6. From the referenced NYTimes piece: “The most contentious issue is health care coverage of the workers, who typically earn about $450 a week. The companies, which until now have paid the entire cost of that coverage, want employees to begin paying $5 to $15 a week. ”
    Yep, those malicious bastards at Safeway are completely unreasonable.

  7. David – Stores like Safeway shouldn’t sell cigarettes to minors but if others want to smoke that is their choice. Why should a store stop selling tobacco to adults who can legally purchase and use these products?
    By the way, if you were truly a cynic and wanted to reduce healthcare costs in this country you would hand out cigarettes for free or place no tax on them. The societal healthcare costs due to early incidence of cancer and heart disease would likely be offset by those individuals who lifespan is shortended and don’t reach the eligible age for Medicare.
    I am not advocating this position by any means but I am very worried about this issue of how far we should go as a society to incent/punish people to comply with certain behaviors.

  8. Rob–this appears to be a reasonable approach for a company to take. We can all think of examples where the plan is not perfect, but to me it is far better to encourage (push?) the majority of people to try to improve their health status rather than do nothing, which appears to be what you are proposing, and is what our healthcare system has done for the past 40 years. Accidents should be what insurance is for–and not for chronic diseases that are very preventable in many cases.

  9. California Sues Safeway for Selling Cigarettes to Minors June 18, 2004 (yes, it is dated)
    Companies like Safeway and Wal-Mart complain about the high costs of health care yet they make major profits from selling tobacco products and they also profit from selling unhealthy food (e.g sugar Coke, chips, etc.) making the nation obese.
    One way all of the major retailers can help our health care crisis is to stop profiting from selling cigarettes and not sell them at all making them much harder for people to purchase. They should discount Diet Coke by 50% and increase the cost of sugar Coke by 50% to induce shoppers to eat and drink more healthfully. Why doesn’t someone ask Ken Shachmut to ask his Safeway management to set an example for the nation’s major retailers and stop selling cigarettes? They could then challenge other major retailers (e.g. Wal-Mart) to follow suit to be good corporate citizens that contribute to the health of America.
    Another idea is that in addition to setting a national example of being good corporate citizens by stop selling cigarettes they should lobby state legislatures (e.g. California) to pass a law that there is a massive $100,000 fine for selling cigarettes to minors that way retailers will be very careful to check IDs.

  10. This is a great interview. I would like to see more details on how the Market-based health care system works. Just went to check some of the CAHR write ups and there is a lot of material there but it lacks a narrative aspect. The information on Safeway, for example, is far better presented in this interview than in the CAHR site. One major question. If Safeway can find out the cost of procedures in areas near its facilities, why not provide that information systematically to all it’s employees up front?

  11. Sooo. Is there an incentive not to ski, so as to avoid bone fractures? Is there an incentive not to cross the street, or drive distracted, or maybe owning a house with a narrow, tall stairs?
    Yeah. I’m not convinced. Accidents bankrupt people too, and worse, put them out of work. How does this work?
    I take responsibility for my actions to the extent that I know, for sure, I’m screwed if something bad happens to me, even if it’s not my fault. I guess that makes me a “real American,” because I know I’m on my own.
    I know that I can be ruined in one simple sad moment, for the rest of my life, for good. And I know it’ll be some Calvinistic punishment for some sin I won’t remember. Because that’s how it works, right?
    Bad things only happen to bad people. Right?
    Ah. We only help the good, because they don’t need help.
    I love this country. I do.

  12. Looks like my link above is a little dated. Thought it said 2008, but it is 2003. So did the new plan come out of the actions of 2003? And how does the cost of Safeway coverage compare to other employers? And I wonder how “happy” workers with little chose are at being “encouraged” to change lifestyle? As far as fair goes, well that’s debateable. Different metabolisms mean some people will work much harder to get the same or less results, some people will not be able to get there at all. My wife has had a terrible time trying to control her cholesterol and refuses to take side affect drugs. We have changed our diet to vegetarian and we exercise, but her numbers won’t go down. Yet we are both healthy. So how does Safeway handle this case?