Leveraging Healthcare Costs to Drive 401(k) Contributions & Improve Health

Health & Retirement Savings:

1. Kirkham, Elyssa; 1 in 3 Americans Has Saved $0 for Retirement; TIME: Money; March 16, 2016; http://time.com/money/4258451/retire-ment-savings-survey.

Executive Summary

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Even with tax incentives, financial education, simple planning tools built into 401(k) plans, and auto-enrollment initiatives, moving the needle when it comes to increasing retirement savings is a major challenge.

Data from HealthView Services, whose clients serve approximately 30 million plan participants, show that when the projected costs for a specific goal – meeting healthcare needs in retirement – are shared, the average employee increases their 401(k) contributions by as much as 25%.

This paper highlights the importance of health to financial planning decisions and the ways in which healthcare cost data can incentivize employees to both manage health conditions and increase retirement savings.

Key Takeaways

1. Health improvements create financial opportunities. A 50-year-old man diagnosed with high blood pressure could save an average of $2,234 per year in out-of-pocket healthcare costs, and add three years to his life expectancy by properly managing his health.

2. Solutions are achievable. By improving health and investing the savings, a 45-year-old woman with type 2 diabetes and high cholesterol could add more than $100,000 to her 401(k) retirement savings and eight years to her life expectancy through simple changes such as moderating alcohol intake and continuing to take medication as prescribed.

3. Employer savings from improved health condition management are significant. A self-insured company with 5,000 employees could save more than $2.5 million in healthcare costs.

Encouraging working Americans to save more for retirement is a priority for employers, 401(k) plan administrators, and financial advisors. Despite attempts to motivate individuals to save more, contributions to 401(k) plans (as a percentage of worker income) have barely increased over the last two decades. Average 401(k) balances remain far below the levels many will need to maintain their standard of living in retirement, and one-third of workers have no retirement savings.1

For more than a decade, HealthView Services has worked with large financial institutions and 401(k) plan administrators to provide retirement healthcare cost projections for plan participants. Drawing upon 70 million medical case studies, actuarial and government healthcare statistics, and economic data, the firm’s cost-projection algorithms have consistently demonstrated that healthcare costs will account for a growing portion of retirement budgets. HealthyCapital - a joint venture between HealthView Services and Mercy - incorporates this healthcare cost data into its flagship application.

A number of leading financial services firms currently incorporate HealthView’s cost projections into their planning tools for participants. Although the specific increases within each plan are confidential, one administrator reported that when the projected cost of healthcare in retirement was shared, average participant 401(k) contributions increased by as much as 25%. In a behavioral context, the reasoning behind the larger contributions is consistent with what we might expect: people are normally far better at saving for important and tangible financial goals (such as a house, car, or healthcare expenses) than for retirement in general. The data indicates that participants feel covering healthcare in retirement is an important and specific priority and an attainable objective. When the projected cost data is shown, it provides them with a specific objective to motivate participants to increase their savings.

Incentivizing Wellness: A New Dimension of 401(k) SavingsA healthy 65-year-old couple will need $228,771 (in today’s dollars) to cover their future healthcare. These expenditures amount to 136% of the average 401(k) balance for individual Americans at that age.2

It is important to recognize that the savings required for healthcare costs in retirement are largely dependent upon the management level of an individual’s health conditions. A couple with chronic health conditions – including diabetes, high blood pressure, high cholesterol, and obesity – may pay significantly higher annual out-of-pocket costs. Approximately 50% of the population suffers from one of these chronic health conditions3 – and more than 15% use tobacco products4. The good news is that all of these health factors can be modified by individual behavior.

Often, simple lifestyle changes, such as reducing sodium in one’s diet or taking medication as prescribed, can significantly lower annual healthcare costs and generate additional disposable income.

In the same way healthcare cost information can influence financial decisions, sufficient monetary rewards and targeted wellness programs may also help motivate people to save more. With sufficient incentives and clear and tangible goals, individuals can be motivated to take steps to improve their health. Furthermore, by showing the value of savings from improved health, plan participants can be motivated to increase retirement savings for longer, healthier retirements.

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Healthcare Costs & Retirement Savings

2. Stanek, Becca; The Average 401(k) Balance by Age; SmartAsset; May 15, 2018; https://smartasset.com/retirement/average-401k-balance-by-age.

3. Ward BW, Schiller JS, Goodman RA. Multiple chronic conditions among US adults: a 2012 update. Prev Chronic Dis. 2014;11:E62.

4. Current Cigarette Smoking Among Adults in the United States; Centers for Disease Control and Prevention; 2018; https://www.cdc.gov/tobacco/data_statistics/fact_sheets/adult_data/cig_smoking/index.htm

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Healthcare Costs & Retirement Savings continued...

5. NEJM Aug 4, 2005; 353(5): 487-97

The key to sustained lifestyle changes, which can improve health and reduce costs, is having short-term achievable goals (such as losing two pounds or walking three times per week) tied to a long-term benefit.

All healthcare cost projections presented throughout this paper are shown in present value, except where future value is required for comparative purposes.

The data in Tables A-C show that significant annual savings and longevity improvements can be achieved through better condition management. Following basic health recommendations – which often are as simple as taking medications as prescribed (50% of the population stop taking prescribed medication within 6 months of being diagnosed with a chronic condition)5 – can mitigate a substantial portion of the added medical expenses associated with a chronic health condition or lifestyle.

The potential to increase disposable income through healthcare savings provides plan participants an opportunity to invest more, without reducing their take home income. Additionally, companies benefit from measurable cost savings through a healthier employee base. By allocating a small portion of their measurably lower expenses to incentivize participants to better manage their health, they can further improve employee wellness.

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Healthcare Costs & Retirement Savings continued...

* Savings include cost of cigarettes (one pack/day). Average Managed Cost is omitted because there is only one health modification: cease tobacco use.

TABLE A

HIGH BLOOD PRESSURE

TABLES A-C

HEALTHCARE COSTS FOR 50-YEAR-OLD MAN WITH VARIOUS CONDITIONS, BASED ON HEALTH MANAGEMENT

$7,004

$5,682

$5,065

$1,939

$7,533

$6,292

$5,299

$2,234

72 years

76 years

80 years

+8 years

84 years

86 years

87 years

+3 years

AVERAGE ANNUAL PRE-RETIREMENT

HEALTHCARE COSTS

EXPECTED LONGEVITY

EXPECTED LONGEVITY

Poorly Managed

Average Managed

Well Managed

Difference (Poorly to Well)

Poorly Managed

Average Managed

Well Managed

Difference (Poorly to Well)

TABLE B

TYPE II DIABETES

TABLE C

TOBACCO USE*

Data is presented in today’s dollars and includes pre-retirement costs with an employer-sponsored HMO plan. For each table, out-of-pocket costs associated with hospitalization, doctor visits and tests, and prescription drugs are included.

$6,347

$4,423

$1,924

79 years

84 years

+5 years

EXPECTED LONGEVITY

Active Tobacco User

Non-Tobacco User

Savings (Poorly to Well)

AVERAGE ANNUAL PRE-RETIREMENT

HEALTHCARE COSTS

AVERAGE ANNUAL PRE-RETIREMENT

HEALTHCARE COSTS

To demonstrate the potential benefits of sharing health condition data to encourage healthier behaviors and retirement savings, let’s focus on Jane, a marketing manager at a large corporation. Jane, a 45-year-old woman planning to retire at 65, was recently diagnosed with type 2 diabetes and high cholesterol. She, like many others with her conditions, has failed to follow even basic doctor’s orders, including limiting her salt intake or opting for healthier fats, like avocados and nuts.

With the assistance of a new wellness program offered by her employer, Jane has now decided to adhere to her physician’s recommendations, which should reduce annual medical expenses and increase her chances of living longer. Her employer’s program includes health coaching through a text-messaging service which has generated impressive response rates: 71% of users engage at least once a week and 96% at least once a month.6 Jane is optimistic about the program after hearing about her coworkers’ success. Furthermore, her employer is offering a financial incentive for team members who sign up, so the choice is simple: a longer, healthier life and more money in her pocket. By taking steps to manage her conditions, Jane will increase her expected actuarial longevity by eight years (76 to 84). Additionally, she can reduce her average annual pre-retirement healthcare costs by $3,371 (over $67,000 total). Table D demonstrates the financial improvement that Jane can experience in accordance with improving the management of her health condition through simple behavioral changes.

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JaneCASE STUDY

TABLE D

JANE’S ANNUAL PRE-RETIREMENT HEALTHCARE COSTS BASED ON HEALTH MANAGEMENT

AGEHEALTH IS POORLY

MANAGED

$5,974

$8,598

$12,850

$17,335

$21,095

$254,887

$12,744

45

50

55

60

64

Total

Average

$1,550

$2,259

$3,478

$4,609

$5,404

$67,431

$3,371

HEALTH CARE SAVINGS

$4,424

$6,339

$9,372

$12,726

$15,691

$187,456

$9,373

HEALTH IS WELL MANAGED

All costs shown in future value.

6. Improving Glycemic Control With a Standardized Text-Message and Phone-Based Intervention: A Community Implementation; JMIR Diabetes; July 25, 2017; https://diabetes.jmir.org/2017/2/e15/

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Jane continued...CASE STUDY

If Jane were to invest her savings from managing her condition into her 401(k) (with a 6% annual return) she would increase her balance by $108,639 at age 65. Table E demonstrates the potential growth of Jane’s savings due to the improvement of her health condition from age 45 until retirement at age 65.

TABLE E

VALUE OF JANE’S 401(K) SAVINGS

AGEYEAR-START BALANCE

(6% GROWTH)

$0

$1,643

$3,353

$5,303

$7,534

$10,125

$13,127

$16,632

$20,593

$25,057

$29,946

$35,429

$41,569

$48,359

$55,743

$63,767

$72,479

$81,931

$92,177

$103,235

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

$1,550

$3,163

$5,003

$7,108

$9,551

$12,384

$15,691

$19,427

$23,639

$28,251

$33,424

$39,216

$45,621

$52,588

$60,158

$68,376

$77,293

$86,960

$97,391

$108,639

BALANCE OFINVESTED SAVINGS

$1,550

$1,520

$1,650

$1,805

$2,017

$2,259

$2,564

$2,795

$3,046

$3,194

$3,478

$3,787

$4,052

$4,229

$4,415

$4,609

$4,814

$5,029

$5,214

$5,404

HEALTH CARE SAVINGS

CONTRIBUTED

The following projections do not include any financial incentive from an employer that can be allocated towards the employee’s savings balance.

The Health Management Retirement Funding Index With 401(k) savings falling short of what many will need in retirement, the opportunity to add to retirement savings through improved health has the potential to be a game-changer. By making healthier choices and investing the savings, plan participants have the potential to increase income in retirement and use it to address healthcare expenses throughout retirement. Income from healthcare savings can be withdrawn annually to fund a portion of in-retirement healthcare costs. Jane would, for example, be able cover 45% of her total lifetime retirement healthcare costs using this simple approach.7 If savings at retirement were not enough to motivate better condition management, HealthyCapital’s new Health Management Retirement Funding Index – the percentage of retirement healthcare costs that can be funded by savings from improved health - frames them in the context of addressing future healthcare needs. In addition to the financial benefits, it’s important to note that Jane will also experience a significant increase in projected life expectancy. Without making lifestyle changes, her actuarial longevity projection was just 76. By following doctor’s orders, that age jumps to 84 – an improvement of eight years. Table F uses the Index to highlight the benefits of adopting doctor-recommended behavior modifications and investing the savings to fund future health expenses for specific conditions.

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Jane continued...CASE STUDY

TABLE F

45-YEAR-OLD WOMAN’S HEALTH MANAGEMENT RETIREMENT FUNDING INDEX FOR OTHER CHRONIC CONDITIONS

AVERAGE ANNUAL PRE-RETIREMENT

HEALTH COST SAVINGS

EXPECTED SAVINGS BALANCE AT RETIREMENT

$3,561

$1,830

$2,401

$112,481

$57,146

$91,783

32%

20%

30%

+3 years

+2 years

+6 years

HEALTH MANAGEMENT FUNDING INDEX

INCREASE IN EXPECTED LONGEVITY

High Blood Pressure

Obesity & High Cholesterol

Tobacco Use*

* Cost savings include cost of cigarettes (one pack/day).

7. HealthyCapital Data. Assumes Part B premiums are deducted from Social Security and costs to fund include Part D premiums, Supplemental Plan F premiums, and out-of-pocket costs related to doctor visits, tests, and prescription drugs.

All 401(k) stakeholders – including participants, plan-sponsors, and record keepers – benefit from lowering healthcare costs by improving the health of employees. While individuals may reduce annual out-of-pocket health expenditures by as much as several thousand dollars each year, the financial gains for the employer are potentially even more substantial.

It is no secret that paying for healthcare is an enormous expense for companies. Employers typically fund 70-75% of an employee’s premiums, and year-to-year costs are directly related to workers’ general health. For self-insured employers, annual costs are significantly impacted by claims and the health of their employee population. Plan sponsors may significantly reduce expenses by promoting workplace programs that will not only improve wellness and productivity, but also decrease participant healthcare costs.

Tables G-I below use modest assumptions to highlight the potential savings for a 5,000-employee company:

3 56% of employees – when provided an incentive from an employer to participate – sign up for the wellness program8.

3 Of the 56% participating, 50% have a chronic condition. This consistent with the national average.3 Therefore, 28% of the entire employee population is participating in the wellness program and also has a chronic condition.

3 From a conservative perspective, of the 28% described above, only half will likely actively engage in the wellness program. This now represents 14% of the total employee population.

3 Employee and employer’s cost savings are consistent with actuarial and health insurance averages.

3 It is also assumed that the employer will provide a $200 incentive to employees who sign up for the program and incur a wellness program cost of $45 per employee per year.

Based on the above assumptions, the firm will net over $2.5 million in savings.

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Plan Sponsor Savings from Employee Wellness

8. Mattke, Soeren Et al.; Workplace Wellness Programs; US National Library of Medicine; November 30, 2015; https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5158287/.

TABLE G

TOTALEMPLOYEE BASE

PARTICIPATING EMPLOYEES

2,8005,000 1,400 700

PARTICIPATING EMPLOYEES W/

CHRONIC CONDITION

PARTICIPATING EMPLOYEES W/ CHRONIC CONDITION IMPROVING

HEALTH

TABLE H

EMPLOYEE’S ANNUAL SAVINGS FROM

IMPROVED HEALTH

EMPLOYER’S ANNUAL SAVINGS FROM

IMPROVED HEALTH

$4,800$1,600 700 $3.360mm

TOTAL EMPLOYEES W/IMPROVED HEALTH

TOTAL SAVINGS

TABLE I

INCENTIVE$200/ PARTICIPATING

EMPLOYEESESTIMATED PROGRAM COST

$45/EMPLOYEE

$225,000$560,000 $785,000 $2.575mm

TOTAL COSTNET SAVINGS AFTER

EXPENSES

The approximate 328% return on investment above may seem high, but is consistent with other targeted and tracked wellness programs, such as one by the Rand Corporation, which experienced a 380% ROI when the management of individual diseases was measured.9 A similar study conducted during a Johnson & Johnson wellness initiative found a return of $2.71 for every dollar spent.10 Finally, a HealthAffairs study of multiple wellness programs found an average ROI of $3.27 for every dollar spent in medical costs, specifically, and another $2.73 for every dollar spent in absenteeism costs, alone.11

While many companies do not currently measure the effectiveness of their wellness initiatives, employers should be implementing solutions that offer administrative tools that collect claims data to show actual cost savings by year, age group, and condition on an annual basis. This is the HealthyCapital approach. This allows executives the option to tweak their practices to maximize returns and provides a testing platform for organizations to optimize their wellness programs. Plan sponsors also have an opportunity to show participants how improved health can lead to lower costs and greater retirement savings through their 401(k).

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Plan Sponsor Savings from Employee Wellness continued...

9. Do Workplace Wellness Programs Work?; RAND Corportation; 2014; https://www.rand.org/content/dam/rand/pubs/research_briefs/RB9700/RB9744/RAND_RB9744.pdf.

10. Berry L, Mirabito AM, Baun W; What’s the Hard Return on Employee Wellness Programs?; Social Secience Research Network; May 24, 2012; https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2064874.

11. Baicker K, Cutler D, Song Z; Workplace Wellness Programs Can Generate Savings; HealthAffairs; February, 2010; https://www.healthaffairs.org/doi/full/10.1377/hlthaff.2009.0626

Health has a significant impact on financial and personal decisions. The information in this paper illustrates the benefit of utilizing healthcare cost data to encourage healthier behaviors. This, in turn, will reduce annual medical expenses and increase disposable income that can then be used to augment retirement savings, ultimately helping participants to live longer and healthier lives. On a list of what is most important to people, health is at the top. So perhaps it should come as no surprise that most people want to ensure that this tangible need is covered in retirement.

While the paper primarily focuses on the financial benefits of health improvement, there are other compelling elements – including longevity – to consider. Research shows that while the quality of healthcare impacts only 10% of the factors that lead to risk of premature death, individual behavior is four times more important, affecting 40% of those premature death-related factors.12 Since most people want to live long, healthy lives, the motivation to make lifestyle changes already exists on some level – so providing employee incentives that are significant and specific enough can further drive those motivations to produce action.

This paper outlines the significant savings that can be realized through better managing health conditions and the process of setting specific goals (ie: taking prescribed medications, or decreasing salt intake). These goals, and increased annual savings, lead to greater funding for healthcare in retirement and the ability to live longer, healthier lives.

It is clearly difficult to modify behaviors and get people to take steps toward reducing weight and eating better, but when the incentives are aligned with our interests, goals, and support mechanisms that help us on the journey, improvements in health and increases in savings for retirement are achievable. Ultimately, implementing meaningful, measurable, and successful wellness programs is beneficial to all parties involved:

3 Financial institutions will retain more assets under management.

3 Firms will experience a considerable reduction in heath-related expenditures and enjoy greater productivity from an invigorated workforce.

3 Americans who live longer and save more may see the greatest reward: a lengthy, healthy, and financially stable retirement.

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Conclusion

12. Schroeder, Steven A.; We Can Do Better — Improving the Health of the American People; The New England Journal of Medi-cine; https://www.nejm.org/doi/full/10.1056/NEJMsa073350.

A joint venture between Mercy and HealthView Services, HealthyCapital’s physician-and-actuary reviewed approach, draws upon medical cases as well as government, economic, and claims data to project healthcare costs, healthcare reductions, and life expectancies to its clients and users. HealthyCapital’s application transforms cost data into individualized and powerful incentives that motivate improved health through simple but specific behavior modifications and the assistance of health coaching. Similarly, it displays the potential savings that can be gained through those behavior modifications – providing an effective motivational tool to all clients and users alike.

With this, HealthyCapital is able to present an aggregate view of an employee population to their clients; using claims data to deliver an overview of actual savings in healthcare costs annually, due to the use of the program. This aggregated view displays to administrators that simple changes made by their individual employees result in large annual healthcare cost savings. Thus demonstrating that while consumers often don’t follow all of their doctor’s orders, a few moderate changes can significantly impact their own annual healthcare costs, as well as those incurred by their employers – to a much larger degree.

About HealthView ServicesHealthView Services is the leading provider of retirement healthcare cost data, Social Security optimization, and long-term care retirement planning tools for the financial services industry.

About MercyMercy, named one of the top five large U.S. health systems in 2018, 2017 and 2016 by IBM Watson Health, serves millions annually. Mercy includes more than 40 acute care and specialty (heart, children’s, orthopedic and rehab) hospitals, 800 physician practices and outpatient facilities, 44,000 co-workers and 2,100 Mercy Clinic physicians in Arkansas, Kansas, Missouri and Oklahoma. Mercy also has clinics, outpatient services and outreach ministries in Arkansas, Louisiana, Mississippi and Texas. In addition, Mercy’s IT division, Mercy Technology Services, supply chain organization, ROi, and Mercy Virtual commercially serve providers and patients in more than 20 states coast to coast.

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About HealthyCapitalTM

HealthyCapital draws upon data from clinicians, healthcare cases, actuarial data and govern-ment statistics in order to determine and project healthcare costs and life expectancies. The dataset covers the general population from 18 to 90 through life expectancies as high as 110. By drawing upon claims data from clients, HealthyCapital also delivers actual savings in healthcare costs from year to year due to the use of the program.

Pre-retirement cost projections are based on group health management organization (HMO) premiums and out-of-pocket costs (OOPs) related to hospitalization, doctors, tests, and prescription drugs.

Retirement healthcare cost projections include Medicare Parts B and D, and Supplemental Plan F insurance premiums. (It is assumed that most Americans paid Medicare taxes while employed and will not be responsible for Medicare Part A premiums.) Projections also include out-of-pocket expenses related to hospitalization, doctors, tests, and prescription drugs.

Calculations assume actuarial longevity for different ages, health conditions, and condition management.

This report includes the impact of behavior modifications on healthcare costs and life expectancy. When an individual is classified as average managed or well-managed, varying cost and life expectancy factors are applied to baseline values to adjust for each level of health management status.

Future value data represents amounts after undergoing projected growth rates, without adjusting for inflation. Present value data represents a future value that has been discounted at the national average rate of 3% in order to reflect today’s dollars. For 401(k) balances, the total has also grown at an annual compounding interest rate of 6%. Unless otherwise indicated, the paper relies on present-value estimates. Actual costs and figures for individuals may vary.

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HealthyCapital Data & Assumptions: Calculating Costs

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