Employers that understand proper utilization can identify the waste and inefficiency in their own employee benefit plans.

By: Sean Donnelly (from The PHia Group, LLC)

Some of our client TPAs have been inquiring about methods to drive utilization. Some clients are recognizing that Plans can potentially save a great deal of money by driving Plan Participants to utilization as opposed to traditional methods of procuring health care. Accordingly, we have researched techniques for how groups can drive Participant utilization of cost-effective health care facilities and cost-saving programs.

Employers that understand proper utilization can identify the waste and inefficiency in their own employee benefit plans and thereby begin to contain the cost of health benefits by holding their health plans and other vendors accountable for meeting reasonable utilization targets.


I. Wellness Programs

The Department of Labor has issued guidance regarding wellness incentives offered by a Plan and how they are regulated. Wellness programs are separated into participation-based, standards-based, and progress-based.

A. Participation-Based

A participation-based wellness program is one whereby Participants are rewarded for participation in a program such as membership to a gym. The Plan can reimburse any portion of, for example, a gym membership, as long as the Plan is consistent in its reimbursements and as long as all Participants reasonably have an equal opportunity to participate in the wellness program.

B. Standards-Based

A standards-based wellness program is one whereby Participants are rewarded for attaining a specific goal. An example of a standards-based program is a Plan’s promise of some incentive for attaining a certain weight, or a smoking cessation program.

Standards-based wellness programs are generally considered discriminatory unless the program complies with five rules:

1. The total reward for all the plan’s wellness programs that require satisfaction of a standard related to a health factor is limited – generally, it must not exceed 20 % of the cost of employee-only coverage under the plan. If dependents (such as spouses and/or dependent children) may participate in the wellness program, the reward must not exceed 20 percent of the cost of the coverage in which an employee and any dependents are enrolled.

2. The program must be reasonably designed to promote health and prevent disease.

3. The program must give individuals eligible to participate the opportunity to qualify for the reward at least once per year.

4. The reward must be available to all similarly situated individuals. The program must allow a reasonable alternative standard (or waiver of initial standard) for obtaining the reward to any individual for whom it is unreasonably difficult due to a medical condition, or medically inadvisable, to satisfy the initial standard.

5. The plan must disclose in all materials describing the terms of the program the availability of a reasonable alternative standard (or the possibility of a waiver of the initial standard).

Note that while a tobacco cessation program, for instance, would likely be considered standards-based if the reward were provided for quitting smoking, a wellness program that provides incentives for employees who do not smoke would likely be considered participation-based, as both smokers and non-smokers alike are potentially able to refrain from smoking.

C. Progress-Based

A new type of wellness program that groups are beginning to use is a progress-based wellness program. These, as the name suggests, reward Plan Participants based on progress towards a certain goal, regardless of whether or not that goal is reached. The Department of Labor has not yet issued guidance on this type of wellness program, so it is not clear whether the standards that would apply to it are the same as participation-based programs or standards-based programs, or altogether different standards. Examples of progress-based wellness programs are losing weight or reducing BMI, but without a set goal to achieve. In a progress-based program, the Plan would, for instance, provide an incentive commensurate with the amount of weight lost or the percentage by which a Participant’s BMI decreased.

II. Disease Management Programs

People with chronic conditions generally use more health care services, including physician visits, hospital care, and prescription drugs. Increases in the number of people living longer with chronic conditions coupled with rising health care expenditures have spurred health plans and employers to look for ways to reduce health care use and costs. Disease management is one approach that aims to provide better care while reducing the costs of caring for the chronically ill by rewarding Participants for participating in select programs, such as by offering them a credit towards the following year’s deductible. Disease management programs are designed to improve the health of persons with specific chronic conditions and to reduce health care service use and costs associated with avoidable complications, such as emergency room visits and hospitalizations.

Disease Management Programs are designed to target individuals with a specific disease. Costly chronic conditions, including asthma, diabetes, congestive heart failure, coronary heart disease, end-stage renal disease, depression, high-risk pregnancy, hypertension, and arthritis are the focus of these programs. Health plans generally contract with vendors, also known as disease management organizations, to provide services. Some, however, choose to operate the program themselves.

Disease management generally entails using a multidisciplinary team of providers, including physicians, nurses, pharmacists, dieticians, respiratory therapists, and psychologists, to educate and help individuals manage their conditions.

Participants can be incentivized to enroll in such programs through the use of “care-targeted benefits,” which are essentially dollars that members can earn by actively participating in the applicable disease management program. Program members are typically assigned a nurse coach who tracks their participation and monitors their progress. Earned dollars can then be used to cover additional deductible, coinsurance and co-pay costs directly related to their illness.

The following are some examples of disease management programs that successfully reduced health care use and costs:

(1) Health care service use and expenditures decreased for about 7,000 people in a diabetes management program after one year. While enrolled in the program, individuals were more likely to receive tests to monitor their blood sugar, foot and eye exams, and cholesterol screenings. Compared to use prior to enrollment in the program, hospital admissions and bed days each decreased by about 20 %. These outcomes likely contributed to total savings of $44 per month per enrollee. (R. Rubin et al. (1998). “Clinical and Economic Impact of Implementing a Comprehensive Disease Management Program in Managed Care.” Journal of Clinical Endocrinology and Metabolism).

(2) Children enrolled in a pediatric asthma management program implemented by North Carolina’s Medicaid program used certain health care services less frequently. Children in the program had a 34 % lower hospital admission rate and an 8 % lower emergency room rate, compared to children not in the program. Even with the increase in pharmacy costs, the average episode cost for children enrolled in the program was 24 % lower than for non-enrollees. (NGA Center for Best Practices (2003). “Disease Management: the New Tool for Cost Containment and Quality Care,” Issue Brief).

(3) Two years after enrolling in a disease management program for congestive heart failure, Florida Medicaid beneficiaries were monitoring their condition more closely and spending fewer days in the hospital. Beneficiaries were more likely to take prescription drugs to control their conditions and to receive an annual cholesterol screening. The number of days spent in the hospital decreased by 39 % over the two-year period, and health care expenditures for the 2,500 beneficiaries decreased by 16 % — a savings of $4.4 million after program costs. (Statement of Christobel Selecky, President-elect of the DMAA, “Evaluating Coordination of Care in Medicaid: Improving Quality and Clinical Outcomes,” before the House Committee on Energy and Commerce Health Subcommittee, (2003)).

(4) People ages 40 and older with heart disease, lung disease, or arthritis enrolled in a six-month disease management program also used fewer health care services. Two years later, patients reported feeling less distressed about their health and that they were better able to manage their conditions. A reduction in outpatient visits, including emergency room and physician visits, and hospital stays reduced health care expenditures by $590 per participant over a period of two years. At a program cost of $70 to $200 per participant, the actual cost-savings ranged from $390 to $520. (Lorig, K. et al. (2001). “Chronic Disease Self-Management Program,” Medical Care).

III. Specific Services

It is permissible for a Plan to offer incentives for utilizing certain services over others. For instance, Plans may provide very low or no copayments or deductibles for use of a nurse triage service or an urgent care center instead of going to an Emergency Room. Such incentives may save the Plan a great deal of money and pass some of those savings along to the Participant.


I. Copayments

The Department of Labor has indicated that a Plan may waive or lower a copayment for the cost of certain services in order to encourage Participants to seek a certain type of care. Examples of such care are well-baby visits and regular physicals. Lowering copayments for certain services can benefit the group by ensuring that its employees and their families are healthy.

II. Deductibles

Similar to copayments, Plans may waive or lower deductibles for certain services. This is at the discretion of the Plan.

III. Conditioned Benefits

The Plan may limit or expand benefits based on the satisfaction of certain criteria. An example of conditioning benefits might include providing one Plan-paid chiropractic visit per every month a Participant maintains a gym membership, or lowering the Participant’s next Emergency Room copay by a certain amount for each regular physical a Participant receives.

IV. Contribution Reduction

A common incentive that Plans provide to Participants is a reduction the contributions required to maintain enrollment in the Plan. Because that is not a cash incentive, as described below, a reduction in the required contribution is not taxable.

V. Cash Incentive

Finally, a group can offer an incentive in the form of cash, whether by tacking the money onto an employee’s paycheck or by simply handing the employee cash.

Cash incentives are subject to taxation. In general, a cash incentive is subject to the same tax rules as all other benefit; the value of the reward is treated as taxable wages and subject to payroll taxes unless a specific exemption allows the reward to be provided on a tax-free basis. In most cases, wellness incentives need to qualify as an employer-provided health benefit or “de minimis” fringe benefit to be provided on a tax-free basis.

Disclaimer: This opinion is based on the facts as presented and re-stated above, and our research. It is a consulting opinion only, and does not purport to offer legal advice or fiduciary guidance as to the denial or acceptance of claims. Ultimately the Plan Administrator has the discretionary authority to interpret the terms of the Plan Document and accept or deny claims for benefits.