In 1992 James Carville, campaign manager for Bill Clinton’s presidential candidacy, famously posted this sign on the wall at campaign headquarters: It’s the economy, stupid! The point of this message was not to literally call anyone “stupid,” but rather to keep the campaign focused on what mattered most to voters.  It worked.

At Safeway, and now through its subsidiary company Safeway Health, the company follows the same philosophy:  Focusing on what matters most.  Safeway Inc. is a $40+ billion grocery retailer that has transformed its approach to health care. For the past six years the company has kept both Safeway’s and its non-union employees’ per capita costs flat, in stark contrast to the national increase in health care costs of 8.5 percent annually.

Safeway is delivering a holistic approach to health, wellness and fitness to its employees and their families with initiatives that improve their health and motivate them to become accountable, quality- and cost-conscious health care consumers. This unprecedented, fully-integrated approach became part of the national conversation on health care reform and was a driver in launching Safeway Health.

The results speak for themselves. Over the five years prior to launching a market-based health care plan (MBHP) Safeway’s health care cost trend was fairly typical of American industry. The costs increased about 10 percent annually between 2000 and 2005. Since launching its MBHP for its non-union workforce in 2006 Safeway’s results have been transformational.

Today (2011) Safeway’s all-inclusive health care costs per capita (Safeway contribution + employee premium + employee out-of-pocket) index at 100 – no change from 2005.  Over the same period, national health care costs have increased more than 60 percent, and now index at 163 (Exhibit 1).

Guiding Principles

Safeway has achieved its benchmark results and will continue to do so by applying three guiding principles:

• Health care costs are concentrated
• Behavior drives costs, but the correct incentives change behavior
• Markets are critical; information enables consumer choice

Concentrated Costs

No matter how you slice the pie, health care costs are highly concentrated in a few areas.  Nationally when both direct and indirect costs are considered, only four conditions (CAD, cancer, diabetes and overweight / obesity) comprise about 74 percent of total costs.  For any individual organization, the top conditions may vary. For example, a company with a large young workforce likely has pregnancy, maternity, infertility, and neo-natal expenses high on its list.

Other organizations may have high musculoskeletal expenses. Invariably, there will be a small number of disease states and conditions that comprise a significant majority of the company’s health care cost.

At Safeway, the focus is on key cost drivers.  This allows Safeway to focus program resources and design initiatives to help members with these conditions deal with them effectively.  When Safeway focused effectively on the conditions that dominate costs, the company was able to bend the curve.

Behavior and Incentives

Seventy percent of all health care costs are caused by unhealthy behavior, and the cost of these unhealthy behaviors is very high. A smoker incurs nearly $1,800 more in average annual health care expense than a non-smoker. Similarly, an obese member on average will spend more than $1,400 incremental health care dollars annually. Other bad behaviors such as lack of exercise, uncontrolled hypertension and uncontrolled cholesterol also are expensive, averaging $500 to $650 each.  Worse still, at least a third (coronary artery disease and obesity) and up to half (cholesterol and diabetes) of people with these basic chronic conditions are not adhering to their providers’ directions, increasing their health risk and eventual health costs.

These low adherence rates are powerful and depressing evidence that our traditional health care system and our conventional health care plan designs do not work well at all, despite the fact the United States spends more on health care, per capita and as a percentage of GDP, than any other developed country.

The good news is these unhealthy behaviors can be reversed, and when they are reversed health care costs go down, and employees’ and their family members’ lives are saved.  Safeway’s health plan addresses these conditions with targeted programs and incentives that provide strong motivation and support for employees and family members to adopt and maintain healthy behaviors.

Safeway’s success with targeted incentives has been dramatic (Exhibit 2).  In only two years with our Healthy Measures program our members have dramatically reversed bad behaviors and adopted good ones – 73 percent for hypertensives, 43 to 45 percent for those with high cholesterol or glucose levels, 35 percent for former smokers, and 21 percent for our obese population.

The roadmap is clear: Identify the disease states that drive your costs and compromise your plan members’ health, correlate those diseases with behaviors that need to be changed, and use incentives to drive healthy behavior.  Be bold and take full advantage of the Health Insurance Portability and Accountability Act (HIPAA) allowances.  HIPAA allows you to reward healthy behavior up to 20 percent of total premium costs – real money for most of your employees.  And, thanks to the “Safeway Amendment” contained in the Affordable Care Act, this incentive rises to 30 to 50 percent in 2014. Failure to act not only allows costs to continue to spiral upwards, but also allows your employees’ and their families’ health to continue to deteriorate.

Creating a Market; Enabling Choice

The U.S. retail health care system is not a true market system.  Markets operate nearly everywhere else in our economy and they work remarkably well. Consumers have reasonable (but imperfect) information about alternatives, they make their own choices, and they pay with their own money. When they like what they purchase, they will buy it again. When they don’t, they won’t.  Good performers are rewarded and prosper. Poor performers are sent strong signals, and they either clean up their acts or they fail. This process of renewal allocates capital efficiently and provides fuel for the engine of economic growth.

Unfortunately, nothing of the kind exists in most conventional health care plans.  Information is hard to come by, the provider of information may have biases, and once consumers “choose” they turn to the employer to pick up the lion’s share of the tab.  Many companies and many readers of this article meet this challenge by offering consumer directed health care (CDHC) plans. These plans often provide a very good start, but commonly don’t go far enough.

For example, when a CDHC is offered as an option frequently only a minority of employees chooses the plan. In addition, the plan design itself doesn’t provide the employees the information they need to make smart, fiscally responsible, decisions in many areas of their care.

Safeway resolved these challenges in several ways.  Safeway’s plan employs transparency tools for medical and pharmacy benefits that incorporate significant price incentives to motivate smart choices for non emergency services. In addition, the company provides robust decision support services to its members, enabling them to seek informed advice which includes evidence-based best practices on any medical condition they face.

Health care costs for the same procedure in a market often vary enormously by provider (Exhibit 3).  And for medical procedures, most of the variation often is found in the facility cost – not in the professional fees (Exhibit 4).

This is another piece of very good news, since the quality of the outcome will be driven largely by the experience and capabilities of the professional performing the procedure, not by the room (facility) in which the procedure is performed.

Taken together, these facts mean that an employer and its employees can save significantly when they shop for non-emergency services, and choose good quality and low cost facilities. In the case of the colonoscopy example illustrated in Exhibit 4 the savings can be more than 70 percent.

To capture this value, Safeway uses robust transparency tools that enable learning about medical conditions and treatment alternatives and create an intuitive online shopping experience for members. Safeway also applies reference pricing to motivate smart behavior.

Safeway employees are both engaged in their medical decisions, and accountable for them. That’s what the company means when it says the Safeway plan creates a real health care market. The results have been impressive.

In pharmacy Safeway has moved well beyond the traditional three-tier formulary, and has trimmed 20 percent of its total Rx spend.  In medical, the company is rolling out transparency and reference pricing to more than 1,500 procedures and expects to save well over 10 percent of total medical spend.  Safeway is currently on track to achieve this goal.

Safeway Health

Safeway Health was formed to assist other companies and organizations to achieve the same results Safeway has experienced – dramatically lower and stable per capita costs, and healthier employees and family members. As one of Safeway Health’s clients remarked, “It’s amazingly straightforward.  When people start acting healthier, they really become healthier. Then they require fewer health care services, and our health care costs go down.”

Safeway Health clients are self-insured, have at least 7,500 employees covered by their health care plans, and are committed to take bold action, led from the top, to drive dramatic results.  Safeway Health partners with clients to aid in motivating those companies’ employees to become healthier, fit, and happier, while also saving the clients and their employees money on their health care costs.

Safeway Health’s innovative approach drives down clients’ costs by increasing personal accountability and utilizing market forces to create incentives for healthy behavior.  Safeway Health provides complete analysis, plan design, employee communications, implementation and post-implementation review. Safeway Health also develops new programs at Safeway Inc. which serves as a beta site, and brings these new successful concepts to the client as part of continuous development and improvement.

“Our business model creates a true partnership with our clients, and the value we deliver is very high,” said Ken Shachmut, executive vice president, CFO of Safeway Health. “For an organization with 10,000 employees covered by traditional health care programs, Safeway Health has the potential to deliver all-inclusive five-year savings of $129 million, create an annuity savings beginning in the fifth year of $45 million, and create $408 million of incremental market value (Exhibit 5). For larger organizations the value delivered is much higher (Exhibit 6).”

One might ask, “Why is it that a grocery retailer can do what my own advisors and benefit team have not done for me to date?”

The answer is that Safeway is comprised of operators, used to resolving tough, interrelated operating challenges in a very competitive retail environment with thin profit margins.  Safeway applied the operator’s mindset, coupled with its legendary expertise in enterprise-wide cost control to health care with unmatched results.

Safeway Health now is helping other companies do the same.

About the Author

As one of Safeway’s top female executives, Larree Renda is responsible for all retail strategies and a broad range of administrative functions for one of the largest food and drug retailers in North America. Her responsibilities include retail strategy, labor relations, public affairs, government relations, health initiatives, human resources, corporate social responsibility and sustainability, industrial engineering, reengineering, and communications.  Along with her other responsibilities, she is the newly appointed President of Safeway Health Inc, a business venture created to provide assistance to other companies in their efforts to create a culture of healthy and better health options for their employees. Renda began her Safeway career in 1974 at the age of 16. She progressed through Safeway’s retail ranks and earned the distinction of being the youngest store manager, district manager and retail operations manager in Safeway’s 80-year history.