Fact or Fiction in the Retirement Wellness Media

Sometimes you just have to wonder. Well, maybe you don't have to wonder, but I can speak for myself -- I certainly do have to wonder. The data that I read about simply cannot coexist. We cannot have record numbers of people deferring to 401(k) plans at record rates and yet still have almost universally low-five figure account balances, on average. At least we cannot unless we also have record amounts of leakage via plan loans, withdrawals, and both deferral and work stoppages.

I'm not going to cite a bunch of data here because I don't have it at my fingertips. I'm on the road and it's 5:30 AM, so think of this as your favorite (or not favorite) blogger ranting. I'm allowed, or at least I'm pretty sure I'm allowed.

Once upon a time (no, this is not the start of a fairy tale or one of Aesop's fables), American workers almost uniformly looked forward to the day when they could retire. They did that, in large part, on the backs of their corporate-sponsored defined benefit plans.

As we knew back then, defined benefit plans had many things about them that worked well toward this goal including (but definitely not limited to):

• Ability to generate lifetime income
• Lifetime income that could be compared to retirement expenses to understand what other resources might be needed
• Workforce management ability for plan sponsors using tools like retirement subsidies and early retirement windows

Since then, we've seen changes ... many changes. Initially, they were design and structure changes. With the growth of 401(k) plans and Congress' constant tinkering with defined benefit plans in a supposed effort to save them, there was first a move toward what we now know as hybrid plans (largely cash balance) and then toward freezing and sometimes terminating those defined benefit plans. Thinking back, the most common complaint I heard from corporate finance executives was the financial accounting volatility. Later on, funding volatility became perhaps a bigger issue.

I'll come back to this part of my rant later, but first it's time to return to my original topic.

According to an article that I read yesterday, 74% of respondents to a question said that lifetime income is important, but only 25% thought they had a way to generate it. So, in a tribute to the recently departed Adam West (the "real" Batman), riddle me this fine readers: "How does this comport with all the other articles telling me how well the 401(k) system is working?" Clearly something must be rotten in the state of Gotham.

We can do all of the modeling that we want and honestly, that modeling is in fact valid if, and that's a big if, participants can follow those models for their entire careers.If a person starts deferring at a reasonable level to their 401(k) when they are, say, 25 years old and continue to defer until some reasonable retirement age, all the while getting reasonable returns, that person will be able to retire and likely not outlive their resources.

They can do that, however, if they can use those balances to generate a steady stream of lifetime income. 

But, having reached the holy grail of retirement, these same people now want to do all the things they dreamed of while working. They wanted to retire to the beach or the mountains. They want to travel the world. They want to spoil their grandchildren. 

There is a problem with all of that. Those expenses are pretty front-loaded. That is, they are going to be very expensive in the first years of retirement. That will in turn deplete account balances that can be used to generate lifetime income. In other words, lifetime income may not be what you thought it was going to be. Or, said differently, the retirement wellness data must have a lot of fiction in it.

Once upon a time, that focus was on defined benefit plans. They focused on the employee who typically retired from a company in their 50s or 60s having worked for that company for 30 years or so. We all know that the current workforce doesn't tend to work 30 years for the same company, so that plan may be wrong.

But a defined benefit plan can still be right. Let it take a different form. Defined benefit plans have evolved to the point where they can look and feel like defined contribution plans, but critically still operate as defined benefit plans.

Why is this so critical? If the large majority of people think lifetime income is important, then we need plans that promote it. Yes, those people can get lifetime income from their 401(k), but if they are doing it through a commercial annuity, they have to purchase that annuity at "retail" rates. On the other hand, if they have a defined benefit plan, they can get better lifetime income from the same amount of money because they are getting the annuity at wholesale rates.

Now, there's a way to generate retirement wellness.

Holy Happiness, Batman.

The Useful and Not so Much of Wellness Programs

A friend and reader referred me to this New York Times article that discusses a DOL-commissioned study performed by the RAND Corporation and PepsiCo. The study looked at wellness programs to determine the relative values of disease management components and lifestyle management components.

I was surprised that the results were so glaring. I'll get into that difference in just a minute.

First, for readers who don't deal in this area every day, it's useful to explain what we are talking about here. Disease management programs target people with chronic illnesses by educating them about their risks, reminding them to see their physicians, and reminding them to take medications. Lifestyle management programs focus on things such as stress management and weight loss.

The study found that disease management produces very meaningful cost savings, but lifestyle management results in virtually no savings at all. First and foremost, the PepsiCo disease management program has reduced hospital admissions significantly, and hospital admissions are one of the leading contributors to high medical claims costs.

Personally, I think there is more to the difference than what appears in the NYT article. Consider a patient with hypertension (high blood pressure). That blood pressure can be measured. There are prescription drugs whose primary purpose is to get a patient's blood pressure under control. Taking that medication once a day is easy as long as you can remember to do it. For most people, since the medications usually don't have severe side effects, there is nothing discomforting about doing this. Patients see the improvements and they are happy. Statistically speaking, a person with normal blood pressure is less likely to be admitted to the hospital than a hypertensive person. And, blood pressure medication is not among the more expensive ones.

How about lifestyle management? How exactly would I measure stress? How exactly would I control my stress? How would I know that my stress was reduced?

To my mind, these are all largely indeterminable elements. I know when I feel less stressed, but it's usually not something that can be controlled. If I think I will have trouble paying my bills, I will be stressed. If I think I will lose my job, I will be stressed. If a family member is ill, I will be stressed. No stress management program can change this.

Looking at the numbers cited in the study, the disease management program saved nearly $4 for every dollar spent on it while the lifestyle management program saved only about 50 cents for every dollar spent. In total, the program saved nearly $1.50 for each dollar spent.

One could look at this in several ways. We could say that the program in total is working. We could say that PepsiCo should eliminate the lifestyle management component. What we can't say is that disease management doesn't work.

If It Wasn't Broke, Why Did You Try to Fix It?

I just returned from the Conference of Consulting Actuaries Annual Meeting (well, I haven't quite returned and I took some personal time in between). As usual, the meeting had some outstanding sessions with great learning opportunities. But, there is one theme that bothers me, and this is not a reflection on the meeting, but on the consulting profession -- too often, when something is working just fine, we have to try to fix it.

More on that in a minute, but first, for my regular readers (and I know that I am bold in putting an s at the end of reader), I apologize for the hiatus. The Annual Meeting was a busy place and time ... and then there was vacation, and while my mind was filled with lots of thoughts, this blog was not one of them.

Returning to my theme, however, I learned about some new (or maybe really old) designs for defined benefit plans. They were intended to be THE SOLUTION. We saw some illustrations. They produced very slightly different results than plans that were already popular. The new ones will be difficult to administer, and, even compared to DB plans of days past, these are designs that no participants will understand.

What's the point?

I also heard about companies that were doing more aggressive cost-sharing in their health care plans. What a wonderful euphemism -- cost-sharing. Isn't that just another name for, you as the employee are going to pay a lot more while we as the employer try to hold our costs down. 

Here is the situation where I find this to be the most laughable. Consider a company that touts its wellness programs. And, it wants to make sure that its employees are healthy and stay healthy (at least that's the propaganda). So, they offer you one regular checkup per year. And, they pay for it ... all of it. But, here's the catch. Suppose you need maintenance medication. Perhaps you have nothing but healthy lifestyle habits. But, your family has a history of high cholesterol. You are burdened with it, too. The longest prescription you can get is 180 days. To get your next refill, you have to go back and see your doctor for blood work (so, that's labs and an office visit). And, in your effort to stay well, neither of them is covered. 

This is the new design that is being touted. 

I liked the old system better. It wasn't broken. Now, it's fixed, and the new system IS broken.

"I see," said the blind man.

Wellness Programs Aren't Free and Cheap Ones Aren't Worth Anything

A recent study by Sibson Consulting found that while an average company spends about $80,000 per year on the pay, paid time off, and benefits for an average employee, only 0.16% of that, on average, is spent on wellness programs. For the mathematically challenged, or for those who would rather I do the math for them, 0.16% of $80,000 is $128 (the study reports that the average is $126 with the difference between my number and theirs due to rounding). That's not very much. What that tells me is that the average company wants to say that they have a wellness program, but that's it.

Sibson went on to conclude that companies that do invest in their wellness or healthy workplace programs do have a decrease in their employee health care costs that exceeds the cost of the program. They pointed out nine key employer actions that are characteristic of companies with the healthiest enterprises.

• Have a program leader and wellness committee. If the program's success doesn't fall to an individual or a small group of individuals, no one will take ownership, no one will fight for it, and the company will see little return on its investment.
• Align a healthy enterprise strategy with the overall business strategy. When employees see the connection, they are more likely to adopt these healthy behaviors.
• Assess the current state. What do you have now and how well is it working?
• Involve stakeholders. Get early buy-in from everyone from top management to groups of employees. While the study report does not say this, it occurs to me that having champions who support the program are an appropriate and useful way to engage employees.
• Consider all the employer programs that contribute to a healthy workforce. This does not just include the standard things like smoking cessation and weight loss programs. Companies should consider how some of their other programs affect employee well being, especially mental health. For example, when a company cuts its 401(k) match, how might this change the stress levels of employees, how will this change the mental well being, and how, in turn, will this affect absenteeism, productivity, and turnover?
• Focus on getting employees to embrace the program. Effective communications are important. Cheesy communications will turn employees off. Be sure that leaders live the message.
• Create an effective workplace. I am not a fan of the word effective here, but I couldn't find a better one than the one that Sibson used. They point out that factors such as lack of trust and respect, as well as harassment, are seriously detrimental to workplace health. While it is difficult to build this into a wellness program, I think this is an excellent observation that negatively affects not just employee productivity, but employee health as well.
• Consider dependents. While the typical American family may no longer have 1.7 kids, dependents typically still represent about one-half or more of total health care costs. Having some programs for dependents may well save an employer more than it spends. And, a program that is available to an entire family is likely to get higher participation from employees than one that they have to participate in without their family members.
• Measure outcomes. No initiative in modern times is complete with measuring it. Successful measurement, though, isn't just focused on the total program, but is able to measure the successes and failures of various components. From this type of measurement comes the ability to make changes to the program to further increase its effectiveness.

Finally, while Sibson did not mention this, I am going to add two more elements to the list. Make it a friendly competition and make it fun. More than 30 years ago, I saw first hand how well this can work. I was working for a very large company that had lots of divisions. While wellness programs were non-existent back then, safety programs were all the rage. Each division had goals to improve its safety performance, and rewards were given to divisions that improved, as well as divisions that had the best safety performance. It made it fun, and it meant that employees didn't cut corners in doing their jobs, if it made it less safe for them or for their co-workers.

Does Your Wellness Program Measure Up?

A survey by Buck Consultants shows that only 37% of employers measure the effectiveness of their wellness programs. In the US, 40% say they have looked at how their wellness program affects their cost of delivering health care benefits. From that group, 45% say that their wellness programs have reduced health care costs, most typically slowing the increases in health care costs by two to five percentage points.

If we look at this from a contrarian standpoint, that means that 63% don't seem to care about the effectiveness of their programs, but I guess they are glad that they have them. Do they have them because everybody else does? Are they just certain that they generate cost savings, but don't care how much the savings are? Do the savings outweigh the cost of the program?

Perhaps the problem is that they don't know how to measure the effect on costs. In the alternative, there may still be many who categorize a wellness program differently than others do. For example, do you have a wellness program if it consists solely of smoking cessation assistance? If that's it, how do you measure the savings as compared to the costs? Aren't you really trading short-term costs for longer term savings as it seems to me that more of the additional costs for smokers appear down the road. I guess I could also say the same things about other initiatives.

I've spoken to consultants at several major firms about measuring the savings from wellness initiatives. It's interesting; there is no standard method. Could it be that each firm has a measurement methodology that gives preference to its own style of wellness initiative?

Don't get me wrong. I'm not intending to belittle the value of wellness programs, but the dollars that an employer spends may result largely in savings ... for some other employer. A well-conceived wellness program should probably change the longer-term behaviors, and therefore the longer-term health of covered employees. Look at any large employer. On average, what is the tenure of their employees? Less than it used to be? Long enough for the savings from the wellness program to exceed its costs? Or are they simply passing their savings on to other employers?

I don't know. I don't really believe that anyone else does either. But, I'd like to see some thoughtful people figure this one out.

IMHO: On High-Deductible Health Plans

High-deductible health plans or HDHPs became all the rage earlier in this decade (yes, a decade begins in a year that ends in 1 and ends in a year that ends in 0). Many have called them consumer-driven health plans as the consumer has a higher financial incentive to choose as a financial buyer.

Their use was supposed to do lots of great things:

• Slow health care inflation
• Provide an incentive to stay healthier
• Generally slow the tide of chronic health conditions such as hypertension, high cholesterol, etc.

Now, understand that I am not a health care expert and I have not taken a formal survey, but I am a consumer of health care services and I do have a fairly large network of people that I talk with. I have been in an HDHP as often as not this decade. Many of my network have as well.

My strong opinion is that HDHPs lead to increases in health care inflation. Yes, you read that correctly. Here is my reasoning. Under HDHPs, initial care is paid for by the consumer, or the patient if you prefer. So, where patients used to go to see their physicians at an early sign of a problem, now they tend to delay. And, that delay, again in my opinion, allows conditions to fester making them worse, and more expensive to treat.

What evidence do I have? I have personal evidence, evidence from family, evidence from friends, and evidence from co-workers. In fact, I have yet to experience a single person from that group who likes being in an HDHP.

But, they do save employers money. How? Through significant redesign and re-packaging, larger percentages of total health care costs are being passed on to the employees and their families. Several companies on which I have seen real data are picking up the inflationary (not health care inflation, but general inflation which has been exceedingly small) costs of health care and passing on the other increases to employees. So, while employees get pay increases (some years) that barely keep up with inflation, their benefits costs increase far more rapidly. 

In technical terms from an employee standpoint: this ain't good (excuse my diversion into poor English).

What works? Again, this is not my area of expertise, but common sense should provide the answer. Give employees an incentive to engage in proper behaviors. While generally it is not permissible to charge higher health premiums in an employer-provided plan for higher-risk individuals (smokers being the exception), it is permissible to charge less for employees who are either lower-risk or who are taking appropriate steps to control their existing risks.

My evidence suggests that this works.

Just like a company saves money by having employees in tip-top physical condition, it also saves money by providing an incentive for those in less ideal physical condition to control their chronic conditions. For example, if an employee's blood pressure is 170/120, this is considered to be hypertensive. Perhaps there is nothing from a behavioral standpoint that the employee can do to control this. But, in most cases, medication can control that hypertension. It is in the employer's best interest that this employee take appropriate medication for that hypertension. To the extent that the employee does take steps to control the hypertension, he or she should be eligible for the appropriate discounts.

So, again, in my opinion, wellness works and HDHP doesn't.