Redirecting Health Coverage

Humana, a major health plan provider, shifted all of its employees to a consumer-directed health care plan—as it designs the same approach for clients.

By Robert J. Grossman Jun 1, 2009

June CoverHumana, the Louisville, Ky.-based health benefits provider, wasn’t immune to the skyrocketing employee health costs bedeviling clients at the turn of the decade. So, the company partnered with its 29,000 employees in an HR-driven restructuring of health benefits. The outcome, according to Humana officials, illustrates how to save money while still providing workers with health care security.

The Beginning

Bonnie Hathcock, senior vice president and chief HR officer at Humana, felt anxious as she went in for her meeting with CEO Mike McCallister. No one enjoys being the bearer of bad news. Hathcock, who reports directly to McCallister and sits on his six-member executive council, was about to paint a somber picture of the company’s own rising health costs.

It was 2000, and Humana, one of the largest U.S. health insurers, was up against a cash crunch on health costs, as many clients were. Annual outlays were $51 million and growing; the previous year, costs had jumped 19 percent. Hathcock told McCallister to plan for a 15 percent surge and to brace for more double-digit increases down the road.

McCallister, who began his career at Humana in 1974, had seen enough. Since becoming CEO in 2000, he had been working to turn the company around, and the dollars spent on health benefits were eating up resources. He had a vision for a new way to fund health benefits, and he needed an architect.

Could Hathcock pull together an initiative central to Humana’s business strategy? McCallister thought she could. She had joined Humana in 1999 after holding top HR positions at U.S. Airways and the Siemens-Rolm telecommunications company. She had experience in sales and marketing. In the past, he had occasionally thought some of her proposals were "too squishy," yet she had proved to be savvy, compassionate and tough.

"Fix it," Hathcock says McCallister told her. "We need to do something different. If we can figure it out for us, it will work for our customers. It needs to be bold, progressive and thoughtful. It has to turn employees from passive users into proactive consumers. And we’ve got to do it in a way that doesn’t hurt employee engagement."

No small order. Hathcock was stunned by the scope of the directive, but she grasped the implications. Humana was about to become the laboratory for an experiment in consumerism—an experiment that could revolutionize employer-sponsored health. "It was a game changer for HR," Hathcock says. "If you can help solve the CEO’s critical dilemma of rising health care costs, you’ve done something strategic."

The Principles

Hathcock formed a team to develop a health care model incorporating aspects of McCallister’s vision—consumerism, wellness, financial literacy, health stewardship and shared responsibility:

Consumerism. The aims are twofold: to transform health care "users"—those who give little thought to the necessity of or the actual costs of medical services—into informed consumers who seek to determine the value, quality and effectiveness of health care before they buy it, and to make sure employees have something to gain financially by acting prudently. Consumer-directed health plans (CDHPs) set high out-of-pocket deductibles for participants before the plans begin reimbursing for outlays.

Wellness. About 20 percent of plan participants account for the majority of costs, according to some analyses, and that population includes high-risk people with chronic conditions such as diabetes, obesity and tobacco addiction. An employer that doesn’t shrink expenses in that population is unlikely to contain long-term health costs. In addition, even healthy people require more care as they age, especially after 65. Wellness programs fit into a larger strategy by encouraging participants to adopt healthful lifestyles, control their weight, quit smoking, get more exercise and take better care of themselves.

Financial literacy. Plan participants should be given tools and information for analyzing the actual costs of their health care options and should be encouraged to spend enough time at the task, McCallister says. "The average person spends 16 minutes each year deciding what benefit plan to choose. How can anyone make an informed judgment when they spend so little time?"

Health stewardship. For sound decision-making, participants should receive information about health and disease management and have access to data about the quality and success rates of hospitals, doctors and other providers.

Shared responsibility. The employer should make clear to employees that they have security from major health care expenses—that the employer plays a major role in providing health care protection—but that employees must shoulder their share of the cost. "They pay for the runny nose, we pay for the cardiac treatments," Hathcock says.

The Rollout

A CDHP was the centerpiece of the company’s newly named package of health offerings, called More Options and Choices for Humana Associates (MOCHA). The first version, unveiled in 2001 and called MOCHA-1, placed the company in the forefront of employers pressing consumer-directed health care as a solution for runaway costs.

MOCHA-1’s consumer-directed health plan featured high deductibles. As MOCHA evolved, the mix of plans changed, but the CDHP retained its high deductibles, positioning it to be eligible for pairing with the tax-favored health savings accounts (HSAs) soon authorized under federal law. The CDHP also provides preventive care with no deductibles, full coverage for services and drugs after the deductible, and a wellness program aimed at effectively managing chronic illnesses.

In addition, Humana offered a $500 stipend to offset some of the deductible. Eventually, in 2003, with the creation of HSAs, the stipend was eliminated and replaced with a program where Humana matches employees’ contributions.

Hathcock pitched health care costs as a dose of reality that associates and managers had to deal with together. Humana would develop a CDHP model that could be cloned and sold as insurance and wellness programs to other employers.

Four thousand of the 15,000 associates at Humana’s Louisville location were targeted during the first round, in 2001. Then and in subsequent years as Humana expanded the program companywide, all were given the option to select the CDHP from a menu that included traditional insurance choices such as a health maintenance organization (HMO) and three lower-deductible preferred provider organizations (PPOs). "We made sure that one of the options was similar to one associates were used to," says Bill Tait, vice president, commercial sales and market operations.

In the first year, 6 percent of the employees who were offered the CDHP converted from traditional offerings—a lower conversion rate than Humana had forecast. "We knew people were risk-averse and that any change is difficult, but still we were surprised," says Deborah Triplett, director of associate benefit programs. People who bought in tended to be financially sophisticated and had done the numbers—people such as actuaries and accountants. "The others held back."

There was more selling and educating to do. "Associates still looked at health care insurance as an entitlement," McCallister recalls. "Working for a company in the business, they thought they should have the best possible health care and it should be free. We had to treat them like adults and stop pretending that it was possible for them to hold on to the past."

McCallister was eager to get everyone on the bandwagon—the longer the transition, the greater the costs. But Hathcock says she "counseled for a longer view, believing that by moving incrementally, we were more likely to build a culture that welcomes positive change."

The Acceptance

In 2002, enrollment in the CDHP grew to 18 percent. By the sixth year—MOCHA-6, 2006-07—it had reached 45 percent. Last July, after scoring 52 percent participation the prior year for MOCHA-7, McCallister bit the bullet. With MOCHA-8, there would be no more choices; other health coverage options were discontinued. Everyone was folded in to the one CDHP, which offered various deductibles in compliance with federal law and the requirements of tax-advantaged HSAs.

Employees can opt out of Humana-sponsored coverage, generally because they are covered by another family member, and sometimes because they choose to have no coverage. Humana numbers among only 6 percent of the Fortune 1000 with a CDHP as the sole option for employees in 2009.

After the announcement, HR professionals braced for the backlash. "People said they were nervous" about morale and employee engagement, Triplett says, "and I got a few complaints in the beginning. But I haven’t had a complaint since the first month, and only a handful overall."

But grumbling surfaced in employee surveys. "Maybe a couple of thousand are naysayers," Triplett says. "Criticisms vary between the truly dissatisfied and those who have constructive ideas."

Adds McCallister: "Though it’s a simplification, I’d say before we started with MOCHA, a third liked what they had, a third hated it and a third couldn’t care less."

The Leadership

The percentages of U.S. companies adopting CDHPs and employees signing on with them are increasing slowly, although there are no projections of rapid growth ahead—possibly because employers are reluctant to remove traditional options. Humana leaders waited almost eight years to convert all employees.

Now, company officials say they wish they had done so sooner. Allowing a few years to make the transition made sense, but extending it longer proved costly in forgone savings and in changing the culture to consumerism. Last year, with 52 percent of its associates in MOCHA-7 and the rest in a PPO-based plan, Humana’s overall medical expenses trend was 35 percent of the comparable trend seen by other employers in markets where Humana has operations.

Numbers for MOCHA-8 as the sole option are not yet available.

Reasons Employees Didn’t Join

  • Resistance to change
  • Lack of information
  • Mistrust of the message
  • Inertia
Clearly, if an employer wishes to benefit optimally, the entire workforce must buy in. "If I could do it all over again, I’d have wrapped up the whole thing in three years," McCallister says.

"You can push the envelope," Hathcock says. "Some associates will complain, but they’ll get over it."

One element in winning acceptance of CDHPs: the employer’s contribution to the HSA. "If you believe in having a high-deductible plan," Hathcock says, "help your employees take care of the deductible through the HSA."

Humana matches employees’ contributions on a sliding scale depending on pay level. Associates earning less than $50,000 are matched $6 for every dollar they deposit in their HSAs, up to $600 for an individual and $1,200 for a family. Those earning $50,000 to $99,999 receive $4 for every dollar they kick in, capped at $400 for an individual and $800 for a family. Associates earning more than $100,000 are on their own and receive no match from Humana.

Providing more to those who earn less recognizes that participants who lack the resources to build savings in an HSA find CDHPs less attractive.

The Risks and Incentives

Because employers with CDHPs absorb all costs after the deductible has been reached, the fewer people who cross that threshold and the less they spend, the better. At Humana, the most popular deductibles selected are $1,350 for individual coverage and $2,700 for family coverage, followed by $3,000 for an individual and $6,000 for a family.

In the long run, employers will save with CDHPs only if fewer participants’ health expenses exceed their deductibles. This requires an investment in programs to help workers avoid costly chronic conditions.

At Humana, each employee who enrolls in the company’s health plan is required to complete a confidential health risk assessment (HRA) questionnaire, made up of about 30 questions designed to help the company target current and potential risks. The assessment includes a disclosure statement informing employees on how the information is used. Information is "de-identified" to protect privacy and cannot be used in employment or compensation decisions. If an employee declines the disclosure terms, Humana cannot use the HRA information in any way other than to give the employee a personal health risk assessment; the employee can still enroll in Humana’s health plan.

If the assessment turns up a risk, "you get suggestions on interventions to help you," says Carleen Haas, SPHR, vice president of talent strategies. "Programs and incentives are offered." The risk assessment for employees in the plan is not optional.

In companies where employees can opt out of the health risk assessment, many do. For example, 25 percent of the respondents to the 14th Annual National Business Group on Health/Watson Wyatt (NBGH/WW) Survey reported participation rates of less than 5 percent; only one-fourth reported more than 50 percent. Employees avoid assessments because of fear that the confidentiality of the information will not be respected or belief that providing the information would compromise their privacy.

In most CDHPs, relatively few employees take advantage of wellness activities. According to the NBGH/WW survey—which polled 489 large U.S. employers in January—40 percent of employers who offer weight management programs report participation rates below 5 percent. Other wellness activities, such as biometric screenings and smoking-cessation and disease management initiatives, are said to be undersubscribed.

To boost participation, Humana offers cash-equivalent financial incentives. Associates can earn as much as $400 in gift cards annually if they wear a pedometer and log a designated number of miles, for example. In 2008, associates earned $1.1 million in this program. They can earn up to $250 more in "wellness account credits" for activities such as donating blood and attending wellness webcasts. Credits can be used for health-related items such as gym memberships, cookbooks, swimming lessons and running shoes. Last year, Humana redeemed $976,000 in credits. In addition, nonsmokers receive a $20 discount on monthly premiums.

There’s evidence to suggest that cash might be a stronger incentive than gift cards or certificates, says Ted Nussbaum, director of Group and Healthcare Consulting in North America for Watson Wyatt in Stamford, Conn. For example, in a Watson Wyatt study, workers preferring $100 in cash outnumbered those preferring a $100 reduction in their premiums by 40 percent.

Another wellness incentive is excluding preventive services and related drugs from the deductible—permitted under federal law for employers who offer CDHPs with HSAs. Eighty-nine percent of companies with a CDHP offer 

100 percent coverage for preventive services, according to the NBGH/WW survey, while only 15 percent offer 100 percent coverage for preventive drugs. Humana pays the full cost in both categories.

The Communication

For HR professionals, a CDHP can spell more work than traditional health insurance, Hathcock says. "You have to work on this every month. You can’t send out four different plans six weeks from the end of the year and be done with it. You have to stay at it constantly, communicating and explaining."

HR professionals have developed materials and programs to help Humana associates analyze options, monitor expenditures, and become knowledgeable about the costs and effectiveness of their health choices. "Everyone learns differently; we’ve found that we need a variety of sources to get the message out," says Alan DeMuro, vice president of resource strategy.

Each employee receives a "Smart Summary" telling them what they’ve spent and noting alternatives that may be better or cost less. Also available online are budgeting tools, cost calculators for pharmaceuticals and medical services, topic guides, and video podcasts.


Services: Health and supplemental benefit plans for employer groups, government benefit programs and individuals in the United States.

Ownership: Public

Top manager: Chief Executive Officer Michael B. McCallister

Headquarters: Louisville, Ky.

2008 revenue: $28.9 billion

Employees: 29,000

Human resource employees: 589

Connections:, (800) 486-2620

In addition, Humana has a team of 275 employees—selected from 600 volunteers—who answer questions. Last year, recruiter and team member Melissa Marciszko spent about 30 minutes each, one-on-one, with 200 associates. "When someone is really upset," she says, "I try to explain the program to them and get their buy-in. I put things in context. They think they’re getting less than they did before under their old coverage, which may or may not be true. Many will break even or even save money. But even if it costs them more, they’re still getting something while a lot of employers are eliminating health care coverage totally. And they have total security after they’ve spent the deductible."

The Pulse

"As we introduce consumerism, we’re measuring the before and after effects," McCallister says. He looks at 10 to 15 indicators, many HR-related, including participation rates in wellness programs, evidence of mastery of program details and employee engagement. "Do the metrics tell me our financials are improving? Do they tell me that associates are using their health care differently? Are they budgeting better?" he says. "The Holy Grail around here is ultimately getting behavior change in people who interface with the health care system on the financial side and in how they are using health care services."

HR staff members keep a close watch on associates’ reactions, especially now that traditional insurance has been eliminated. Associates still have choices, Hathcock says, but now they’re about the high-deductible plans in the CDHP family. Other choices relate to signing on for wellness activities. "The options relate to how you take care of yourself," explains DeMuro.

So far, despite some dissonance, associates seem accepting. "We survey everyone about our programs twice a year," DeMuro says. "We find more and more of our associates understanding what we’re trying to do and appreciating it. When someone complains on an online forum, another employee will respond, offsetting the negative."

Humana also relies on Gallup Organization surveys and consulting to track employee attitudes. "Even in a period where we pushed the other half of our employees into a CDHP, we’re getting significantly higher levels of engagement. We feel particularly good about that," DeMuro says.

"The biggest pushback," Hathcock says, "has been from people objecting to our putting everything online." Humana adopted a paperless communication system when it launched MOCHA in 2001, but some employees found it harder to use, or regretted losing more-personal contact on health benefits matters, or disliked having no printed materials to hold and carry home.

Hathcock says getting everyone onboard is still a work in progress. "Most people understand how their plan works," Hathcock says. "I don’t want to say that everyone is wild about it, but they understand."

The author, a contributing editor of HR Magazine, is a lawyer and a professor of management studies at Marist College in Poughkeepsie, N.Y.

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