The Wall Street Journal Interactive Edition
February 3, 1998
More Firms Use Carrots and Sticks To Help Cut Their Health Costs

By GREG JAFFE
Staff Reporter of THE WALL STREET JOURNAL

Rita DelRey, a legal secretary at a Portland, Ore., law firm, was given an ultimatum by her employer three years ago: Lose weight or lose free health coverage.

She had already dropped 33 pounds in the last two years, but that wasn't enough: She still weighs 12 pounds more than her employer, the law firm of Klarquist, Sparkman, Campbell, Leigh & Whinston, considers healthy.

So while her fitter cohorts receive health insurance at no charge, she must pay $56 a month for her coverage until she drops the weight. The firm has even hired an outside consultant to help Ms. DelRey and others who don't meet the firm's health guidelines do just that.

"They are telling me to eat more wheat, grains and five servings of fruit a day," says Ms. DelRey, who recently bought a new wardrobe full of smaller sizes. "Jiminy Christmas! I'm not a parrot." She adds: "I don't want to lose any more weight. I think I look good and I feel fine."

Employees and their bosses are sparring as never before over what was once a private issue: personal health. Last year, 39% of all employers used some sort of financial incentive or penalty to encourage healthier behavior among their workers. In 1992, only 14% employed such tactics, according to Hewitt Associates, a Lincolnshire, Ill., health-care consulting firm. The trend has also nourished a new generation of "wellness companies," which promise to help identify unhealthy employees and change their habits.

Spurring the move to make employees exercise, stop smoking and watch their blood pressure is simple economics. As managed care becomes more pervasive -- 89% of all employers offer some form -- it's getting harder for companies to cut health costs further.

"All of the easy savings have been squeezed out of the health-care system," says Camille Halton, a benefits consultant for Hewitt Associates. "Now the only way to find additional savings is to make your employees more healthy."

For most self-insured companies, about 80% of health-care bills can be traced back to 20% of employees, says Yonnie Chesley, chief executive of Nashville-based Gordian Health Solutions. Often these employees are overweight, smoke or neglect their health, she says.

Voluntary education programs, giveaways and health fairs don't work, says Ms. Chesley, whose wellness company has about 40 clients. "What happens is that only the healthy people participate," she says. At companies that employ Gordian, she adds, 85% of employees typically participate in the wellness programs after the first few years, and premiums decrease by as much as 25%.

At Klarquist Sparkman, where Ms. DelRey works, employees are healthier and costs are dropping. In 1996, the average claim per employee fell to $2,294, down 20% from the $2,864 the firm paid in 1994. Overweight employees and smokers have given about $13,000 in additional health-care contributions to the firm since the program began.

Similarly, U-Haul International Inc., which until last month rewarded employees who don't smoke and who control their weight with lower co-payments, says it has been able to trim the overall cost of health-care claims by 17.5% since 1992. The percentage of employees who smoke or are overweight has fallen to 36% of the work force from 41% in 1992.

But when employers start ordering employees to live healthier lives, conflicts often arise. At Klarquist Sparkman, there have been arguments over everything from scales to personal privacy.

When the company first started weighing its workers, employees complained that the scales weren't giving accurate readings because they were too old or were on a surface that wasn't level. (To get free coverage, workers can't weigh more than 1.2 times their recommended weight, according to insurance tables.) Eventually, the firm had to buy its own doctors' scale.

Feathers also were ruffled when the law firm began random testing of employees for nicotine. "Some of the employees balked at the tests," admits Nora Gambee, who administers the firm's health plan. "They said it was like Big Brother was watching them."

Ms. Gambee herself doesn't see it that way. "I got overweight and I can't lose it," she says. "Now I have to pay $50 extra a month. That's a pretty good motivator to lose the weight."

Still, critics question whether such programs are ethical. "Right now, companies are going after smokers and fat people," says Paul Terry, vice president of education for HealthSystem Minnesota, a Minneapolis-based health-care provider. "What's stopping them from going after diabetics or gay people, hypertensives or mountain climbers? Pretty soon the only ones who won't have to pay extra premiums are people who spend their free time sitting in lounge chairs, with helmets, sipping Perrier and watching public television."

There are also legal questions. About two dozen states have smokers'-rights laws or lifestyle-discrimination laws, which prevent employers from discriminating against employees on the basis of everything from smoking to drinking to riding a motorcycle in their spare time.

In Connecticut, several smokers, represented by the American Civil Liberties Union, have filed a complaint with the state's Department of Labor against United Technologies Corp., which has a policy of charging smokers an extra $500 a year for their health insurance. The company, based in Hartford, enacted the plan last year, contending that smokers cost companies as much as $5,000 more a year in medical care than their nonsmoking coworkers.

Recently, the state department of labor ruled that it did not have jurisdiction over the complaint. An attorney for the ACLU says his clients plan to appeal that ruling.

For its part, United Technologies says only a handful of employees have complained about the program.

At the federal level, legislation passed in 1996 ensuring the portability of health care also could pose problems to companies that employ financial incentives. That legislation broadly states that employers can't charge different rates based on certain health-related conditions.

U-Haul International ended its policy of charging overweight people more for health insurance because of concerns regarding the federal act. But some specialists say that U-Haul's actions may have been premature.

"The statute is such a muddle and there are so many exceptions to the rule it could take years to straighten out what's legal and not legal," says Kevin O'Brien, a Washington, D.C., lawyer who specializes in employee benefits.