One way to control health care costs is with a wellness program. The authors give an example of how a CPA can assist a small business do a cost benefit analysis to justify establishing such a program.

The continuing upward spiral of health care costs is not news. For several reasons, these costs are rising more steeply for small businesses than for large corporations. One method of reducing health care expenses for a small business is a wellness program.

Unfortunately, justifying a wellness program through cost/benefit analysis is unusually difficult. Such analysis involves an understanding of how employee characteristics affect health care costs, use of historical data and present value computations. The CPA who learns to bridge this gap can provide additional services to clients or employers.

A wellness program is any activity undertaken by the company to reduce health care needs. These programs educate and motivate employees and their families to adopt better health habits. Some objectives are: not smoking, controlling weight, controlling cholesterol and blood pressure, wearing seat belts, adopting nutritional food choices, and achieving a moderate level of fitness. Most wellness programs also screen employees for disease at an early stage when treatment is more effective and less expensive.

Wellness programs are investments made to provide both current and long- term benefits. The benefits from some effective programs will be lower at first but will increase as the cumulative effect of better health habits accrues.

The reduction in the incidence of employee illness will result in a reduction of employer-paid health care costs. Since employer paid health care cost per incident increases over time because of inflation, the benefits of the wellness program will also increase over time.

Typical programs require modest initial expense and continuing investment over the life of the program. This continuing investment will increase at approximately the Consumer Price Index (CPI) rate. This contrasts with health care costs that have historically increased at a rate two to three times that of the CPI.

A cost-benefit analysis using present values discounted at the company's required rate of return can compare these expenses and investments with anticipated savings.

The following steps should be performed in doing an analysis to control health care costs in small businesses:

* Determine the focus of the wellness program;

* Select compatible wellness programs;

* Do a cost-benefit analysis;

* Do a program effectiveness analysis; and

* Perform a post audit.

Example of a Wellness Program Analysis

Money Machining is a small machine shop with twenty employees including several relatives of Mike Money, founder and owner. Money Machining (Money) relies on Carol Credit, CPA, for write-up work and tax, general business, and financial advice.

Carol and Mike have discussed health insurance costs in the past. Money's policy includes reasonable deductible and co-payment requirements. Mike doesn't want to reduce insurance coverage because of the family members employed at Money. Mike and Carol agreed that Carol should investigate the potential of using a wellness program to cut Money's insurance costs. In larger companies the investigation could be performed by CPA employees on staff.

Determine Focus. Health care cost control must focus on factors that are both material and controllable. The firm's health care costs depend on how frequently each type of care is needed and the provider charges for that care. This is true whether the firm pays directly or whether its insurance rates are adjusted based on the company's experience.

Small firms can generally exert little influence on provider charges. The greatest potential for controlling health care costs therefore lies in programs that can reduce the frequency of illness/injury or provide early diagnosis that allows treatment at early stages of disease where treatments are more effective and less costly.

Three factors should be considered when determining if a health care item is material. These are 1) past costs related to the item, 2) the potential impact of an item that may occur in the future, and 3) changes in the covered group.

Factors such as age, sex, and inherited traits are not controllable. However, there are many risk factors that are controllable. These include tobacco use, dietary habits, exercise, and learned behavior such as using seat belts or following safe practices in activities at home and work.

The analysis to determine the focus of wellness programs for a specific company therefore requires a review of past health care costs to identify items that have proven to be costly. Reducing risk factors related to these items should provide predictable and measurable reductions in health care costs.

The analysis should also consider existing risk factors that may not yet have caused symptoms that require treatment. For example, tobacco, obesity, and high cholesterol levels act over a period of time to promote cardiovascular problems even though the affected individual may appear to be healthy right up to the day of a first heart attack.

Finally, changes in the demographic characteristics of the covered individuals over time may change the relevant health care items and risk factors. For example, companies without large employee turnover find the average age of their work force is increasing. This may be reflected in a shift in health care costs from accidents and maternity care to "middle age" diseases.

Carol kept the above factors in mind as she prepared suggestions for the focus of Money's wellness program. Her analysis began with an examination of Money's experience for the past five years using insurance reports and workman's compensation claims from company records.

There were many different types of claims, but the most significant ones relating to controllable factors were cardiovascular diseases, back injuries, and other on-the-job accidents which were primarily lacerations received in the production operation.

Carol noticed that a high proportion of Money's employees seemed to be significantly overweight and were smokers. Only one employee was being treated for high blood pressure. Although Money's insurance policy paid for one routine physical examination every three years, only one employee had taken advantage of the provision.

Money's work force was stable, and the average age of its employees had increased steadily in recent years. Mike confirmed average employee age would continue to increase for several years.

Carol and Mike discussed Carol's findings and agreed a wellness program should focus initially on the risk factors for cardiovascular disease, prevention of back injuries, and job safety.

They recognized employees had not been getting regular check-ups and neither the employees nor the company had a good idea of problems in the making. They decided Money would offer a screening to all employees for risk factors that can be checked inexpensively. These include screens for high blood pressure, high cholesterol levels, colorectal cancer and diabetes. The resulting data would be used to provide a baseline for selecting and evaluating future wellness programs. This presents a delicate situation of personal privacy but persons with unfavorable results would be encouraged by the screening provider to seek appropriate medical attention.

Mike had not realized the extent of the job-related safety problem and wanted to check into it personally. He felt his knowledge of the operation would make him the best person to analyze and deal with the problem. Purchase of a safety program would be deferred until Mike could see how effective his efforts were.

Carol would look into programs related to cardiovascular problems and back injuries for Money. Mike and Carol agreed that several other areas should be considered, but Mike wanted to see the accomplishments of the initial program before making additional commitments.

Select Compatible Programs. Carol reviewed several available programs targeted at cholesterol levels, smoking, and at back injuries.

Cost Benefit Analysis. Carol found that some of the programs for prevention of back injuries could be justified by a small reduction in the current number of back injuries currently being sustained by Money's employees. The savings took into consideration both direct medical costs and the cost to Money for lost work time.

Carol found that a 12.5% premium discount for non-smokers could be obtained on Money's health insurance. Since smoking cessation is a long- term proposition with significant start-up costs and continuing maintenance costs, Carol decided to use present value methods in determining the cost benefit relationship for this program.

A ten-year time horizon was chosen to incorporate the long-term nature of the undertaking while keeping the time period short enough to minimize computational problems. Money's insurance premiums were expected to increase at a ten percent rate over the foreseeable future. Money considered a 15% return on their investment in the program to be adequate justification for the costs.

Carol computed the dollar savings for each of the ten years based on ten percent annual increases in the insurance premium coupled with the 12.5% non-smoker discount each year. She then discounted the savings for each year back to the present using Money's 15% required return. The present value of the savings is $812 per employee, which is the amount available for the initial cost of the program and the present value of any future maintenance costs over a ten-year period.

Carol used the information in the accompanying table for the evaluation of the above described smoking cessation program. The present value computations are not particularly difficult and can be done using a spreadsheet program.

One vendor of a smoking cessation program was willing to base part of its compensation on the number of persons who quit smoking and remained non-smokers for a three month period as a result of the program. References from prior clients of the prospective programs were examined to verify the claimed experience.

The relationship between cholesterol levels and relative risk of a heart attack was used to estimate the potential reduction in Money's costs related to cardiovascular problems. Cost-benefit analysis for programs to lower cholesterol was done in the same manner as for the smoking cessation program with the relative reduction in risk replacing the percentage reduction in premium costs.

Mike reviewed the programs that had survived Carol's analyses and selected the programs he felt were the most compatible with his employees' characteristics.

Effectiveness Analysis and Post Audit

Effectiveness of the programs in changing behavior was estimated by using questionnaires at the middle of each program, at the end of each program, and three months after the end of each program.

Health care costs for the year prior to the wellness program were collected and will be compared with similar data for the first two years after the wellness program was put into effect. Pre-program data was acquired and will be compared with post-program data regarding risk factors present in the employee group.

Additionally, data on total employee absence as well as absences related to targeted wellness objectives will be collected. The total absence rate data is collected because wellness programs often improve the health of employees in areas beyond the targeted objective and healthier employees tend to use fewer sick days overall. This can be an important benefit from wellness programs that can be measured and should not be ignored in evaluating the results of wellness programs.

Early signs of success are participation by many employees in wellness activities, and the adoption of better health habits by the employee families. These are evidence of a future savings for the employer.

Wellness Programs and the CPA Employed in Industry

The general procedure for establishing and evaluating wellness programs are the same as described for the CPA in practice. One major difference is that quite often the Human Resources Department staff can be useful allies and co-workers in developing a wellness program. Human resource managers are often interested in wellness programs but may not have the expertise to do the financial evaluation of wellness programs. The human resource managers may have information on wellness programs and be able to determine what types of programs are available. The CPA's role would be to do the financial evaluation of the available programs to find the best program and then to do a post evaluation of the selected program.

Information on wellness programs can be obtained from:

Wellness Councils of America 1823 Harney Street Omaha, NE 68012

Local Chapters of the American Cancer Society, American Heart Association, and American Lung Association can usually provide inexpensive smoking cessation programs.

William E. Paxton, DBA, CPA, is an Associate professor of business Administration, Ashland University, Ashland, Ohio.

David T. Meeting, DBA, CPA, is an Associate Professor of Accounting Cleveland State University, Cleveland Ohio.

Ralph C. Falconer, JD, is President of Falconer Group, Stow, Ohio, a publisher of wellness newsletters for employers.

FINANCIAL JUSTIFICATION OF NON-SMOKING PROGRAM 10 YEAR PERIOD

This projection is based on an individual hospital/surgical insurance policy for a 45 year-old male, with conversion to non-smoker premium discount of 12.5% at start of 2nd year.

InputData

Currentannualpremiumperemployee$1,030

Annualinflationofpolicypremium10%

Employer'srequiredannualreturn15%

Output

Presentvalueofpremiumdiscountsin

tenyears$812

1234

AnnualPremiumAnnualPresent

premiumdiscountdiscountvalueof

Yearcostin%peremp.discount

1$1,0300$0$0

21,13312.5142107

31,24612.5156102

41,37112.517198

51,50812.518994

61,65912.520790

71,82512.522886

82,00712.525182

92,20812.527678

102,42912.530475

Total$812

1-AnnualPremium--Compoundedatpremiuminflationpercentage

2-PremiumDiscount--Estimatedat12.5%ofpremiumdueto

conversiontonon-smoker

3-Annualdiscountperemployee--Col.1xCol.2

4-PresentValueofAnnualDiscount--Discountedatrequired

annualreturn

PremiumsanddiscountsbasedonStateFarmindividualbasic

hospital/surgicalinsurancepolicy