CFOs Take a Fresh Look at Health and Productivity

The bean counters think benefits are just a cost of doing business, right? Not so, says a new survey that finds CFOs on the brink of investing in the health of their workers and expecting a measurable return.

By Thomas Parry, PhD and William Molmen, JD

The stereotype has it that chief financial officers view health and absence benefits strictly as a cost that drags down the bottom line, but a new survey from the Integrated Benefits Institute demonstrates that CFOs are closer than anyone thought to treating benefits as investments in employees' health, satisfaction and effective presence on the job — all of which drive productivity and profit.

Senior financial executives from 269 companies were surveyed. The majority (55 percent) had 1,000 to 4,999 employees; 28 percent had larger workforces; and 17 percent were smaller. Respondents were about evenly divided among production/distribution and service industries.

Nine in 10 CFOs rate rising health care costs as at least an "important" concern, and nearly one in five calls this a top issue. Concern cuts across employer characteristics such as type of business, size, benefits-reporting structure, workforce demographics and public versus private ownership. That concern alone, however, is not enough to change attitudes toward benefits delivery and availability. More important is the finding that nine out of 10 CFOs recognize the linkage of health to productivity to the bottom line, and the majority of them consider the connection to be strong. Indeed, the link that CFOs make between health and productivity (a nonfinancial view of the workforce) is nearly as strong as the link that they see between productivity and the bottom line (an economic view).

Workforce challenges and strategies

A key challenge for almost 70 percent of CFO respondents is the traditional need to attract and retain the right number of employees with the desired skills. Roughly half the respondents cited the need to motivate and train those employees to perform in the fashion best suited to the company's results.

Lower ranked — between 25 and 40 percent — were challenges related to keeping employees healthy, at work and productive. Whatever the reason, most CFOs do not consider having a worker at work and not off on disability a better option than hiring and training a new employee.

The strategies CFOs value highest match their traditional view of workforce challenges. The front-end goals — to attract and retain employees — clearly drive their strategic plans, whereas managing absence and using benefits programs to achieve business goals (as opposed to providing attractive benefits) are at the bottom of the list. Still, almost two-thirds of the CFOs who identify the top four traditional strategies as important in meeting their workforce needs also see a strong link between health, productivity and the bottom line.

Questions of measurement

Why, then, do CFOs have trouble understanding that managing absence and disability, and using benefits to achieve that goal, can help them meet their workforce needs? CFOs respond to the numbers, and there's a potential disconnect between the way corporate performance and benefits performance are tracked.

Asked to rank their top three measures of financial performance, CFOs gave statistically identical support to cash flow and revenue growth. Growth in earnings and net operating profit clustered close behind. It seems logical, then, that any attempt to interest CFOs in the merits of managing health and productivity as a bottom-line strategy must be expressed in financial terms that they value and are familiar with. Benefits managers, unfortunately, inhabit and measure an entirely different world.

The top three benefit measures (program cost, employee satisfaction and employee retention) say nothing about effects on productivity and job absence. Half of the respondents measure the financial impact of benefits outcomes, but it's likely that they do so in terms of only out-of-pocket costs. To demonstrate health, productivity and bottom-line linkage, benefits programs need to be evaluated in terms of the full costs of absence, sickness and poor health. Instead, only about a quarter of respondent companies look at the impact of benefits on productivity, and a third measure time lost from work due to absence or disability. Health outcomes are even less frequently measured.

If productivity and lost-time results are seldom measured, CFOs can't be expected to know how benefits programs affect the cash flow, revenue and earnings issues that are important to them. Even though the majority of CFOs intuit a strong link among health, productivity and the bottom line, the benefits program measures that would demonstrate that linkage are among the least used.

Nevertheless, three out of four CFOs think that benefit programs have at least a moderate impact on financial performance, and four out of five detect at least a moderate impact from workforce productivity. Even more striking is the differing strength of these convictions. Only 25 percent think benefit plans have great or even critical impact at the bottom line, while nearly 80 percent think as highly of productivity.

Why this difference? Note well that the primary measures of employee productivity — output per employee hour, FTE per revenue unit and revenue per employee — are all closely related to key financial performance measures.

There is one more link between health and the bottom line — the impact CFOs see from the design and management of benefits on the health and productivity of their workforce. Compare the 44 percent of respondents who detect a great or critical impact on productivity from benefit structure to the 25 percent who ascribed a great or critical impact of benefits on the bottom line. In other words, CFOs readily accept that benefit design and management affect productivity and that productivity affects financial performance, but they don't draw an arc from benefits to the bottom line.

What would motivate change?

One way to put these issues into terms that CFOs can accept is to show how changes in benefits delivery can affect productivity; but how much of an improvement would it take to prompt a change in the way the company manages benefits?

Three in 10 CFO respondents were unable to specify the magnitude of change in productivity that would justify a change in their benefits program. For those able to state a target, 83 percent want a change in productivity of 8 percent or less.

Few employers, however, have created tools to measure the productivity gain from a change in their benefits program. Many don't know how many of their employees are out on disability or incidental absence and thus assess productivity based only on those actually at work. The results would change dramatically if the productivity calculation used the combined number of absent and present employees.

What is clear is that the productivity targets necessary to justify benefits program change are not too high for many employers to meet when the full effects of benefits changes are considered. IBI's 2002 full cost of absence study shows that median reasonable targeted savings from reduced absence alone can amount to 5.3 percent of net income and 2.4 percent of payroll.

Changes beyond the addition of absence and disability management programs will deliver additional and substantial productivity improvements and benefits savings as well. For example, disease and wellness management initiatives have been shown to affect disability and absence as well as direct medical costs.

Benefits strategies and programs

CFOs value a variety of strategies for benefits management and delivery, with cost control leading the pack. The second- and third-rated factors — evaluating key drivers of costs and utilization — show an inherent interest in better management of costs, not simply cost cutting. Not far behind are the related issues of reorganizing and intensifying benefits management and redesigning benefits.

Two strategies that are less important for CFOs are evaluating employee health outcomes and the use of health care to increase productivity. One can conjecture that if CFOs are shown that these two issues represent significant dollars, they would move up in importance.

Shifting costs to employees is not a critical strategy for CFOs, perhaps because it may conflict with the top workforce challenges of attracting and retaining employees.

IBI asked CFOs to identify the top three benefits management programs they have or are planning to add. Their choice of prescription drug management as their most important benefits management initiative was not surprising. The second- and third-place ranking of wellness and employee assistance programs, however, reiterates that CFOs aren't focused exclusively on current costs.

Three other management programs may drive some of the CFO interest in pharmacy management: disease management, behavioral health management and wellness. To varying degrees, each depends on the effective use of drugs to moderate or prevent symptoms.

CFOs also report more interest in return-to-work and stay-at-work incentives than they do in absence management. The latter may not be a specific enough concept for CFOs to recognize. Employers also are more likely to track extended disability leaves than incidental absence and thus are often missing the data needed to focus on absence as an issue.

Role of health care providers

To a surprising degree, CFOs understand that health care providers can affect their productivity goals. More than one-third assign a great or critical productivity role to providers, and 71 percent believe that they play at least a moderate role. There is a strong, three-part statistical link among CFOs who:

• See a role for health care providers in managing productivity
• Recognize a link between health, productivity and the bottom line
• Ascribe a strong connection between benefits design and management, and workforce health and productivity

Asked to identify all the roles they see for health care providers vis a vis productivity, CFOs give top marks to the effect health care providers can have on total costs — medical and absence — and not just their traditional effect on medical expenditures alone. Many CFOs also understand that health care providers affect other nontraditional outcomes such as helping workers remain at work and enhancing their performance while on the job.

A surprising 81 percent of respondents included at least one of the nontraditional outcomes in their expectations regarding the effect of health care providers on productivity.

Pharmacy benefit role

Do CFOs view the pharmaceutical benefit as a plus in the treatment and prevention of disease and injury or simply a leading cause of escalating health care costs? More than 80 percent consider it at least an important component to their health and productivity goals, and almost 50 percent believe that it is crucial or very important. This view is consistent with a disease management, wellness and behavioral health management approach.

Another key piece is the extent to which and the direction in which a prescription drug treatment regimen has the potential to affect direct health care and absence-related benefits costs. More than six in 10 CFOs believe that a prescription drug regimen has the potential to reduce total health-related costs. Thus, CFOs view a pharmacy benefit as an important component of meeting their health and productivity goals; and even when just health-related costs are considered, the majority believe that prescription drugs are likely to reduce overall costs.

Conclusion

CFOs are not yet mindful of the effects of their company's health care benefits programs on their financial performance goals — at least in the concrete fiscal terms to which they are accustomed. They are willing, however, to link health care delivery and management to improved productivity, that is, more workers at work producing greater output. From there, CFOs can use their standard measures of productivity to take the next step in crediting increased productivity as a potential lift to their bottom-line expectations.

Surprisingly, CFOs are able to think outside the traditional box when it comes to the impact health care providers and benefits delivery have, not only on medical costs but on the full benefits that can come from increased health and productivity.

Thomas Parry and William Molmen are, respectively, president and general counsel of the Integrated Benefits Institute. IBI is a national, nonprofit research, benchmarking and education organization supported by employers and their benefits suppliers with an interest in health and productivity management through integrating employee benefits. CFO Research Services conducted the survey with the support of Schering Plough Corp. Visit http://www.ibiweb.org/

More Business & Health Articles on This Topic:

A Model Plan: Implementing a Health and Productivity Management Program (Jun. 19, 2002)

Managing the guy who isn't there (Nov./Dec. 2000)

Making the case to top management (July 1999)

Resource Links:

Integrated Benefits Institutehttp://www.ibiweb.org

Thomas Parry, William Molmen. CFOs Take a Fresh Look at Health and Productivity.

Business and Health

2003;3.