COVER STORY: 74th Annual Report of the Grocery Industry Excerpt: The man behind the plan

It was a Harvard Business School professor, Regina Herzlinger, who put the bug in Steve Burd's ear that the industry -- indeed, he himself -- could stop lamenting the dilemma of ever-escalating employee health care costs, and instead take the bull by the horns.

Herzlinger spoke about how employers can be more proactive in reshaping the state of health care in America at the 2005 FMI Midwinter Conference. She made her case via phone, as one of many planned attendees who had been snowed in by a huge East Coast winter storm. But Steve Burd, chairman, president, and c.e.o. of Pleasanton, Calif.-based Safeway, Inc. was there, and Herzlinger's long-distance message lit a fire under him.

Two years later Burd and Safeway have just about wrestled that bull to the ground and tamed it into a steer that's saving Safway money, rather than robbing it blind.

Having turned the tide on its own formerly skyrocketing health care bills, and managing at the same to improve the effectiveness of its health care benefits program for employees, Steve Burd now wants other grocery executives -- and anyone else who’ll listen -- to learn from his company’s experiences. The executive has taken his Safeway health care plan success story on the road, presenting it to his colleagues at the same FMI venue where the idea first took hold, as well as other gatherings of business and government decision-makers. Burd is a man on a mission.

PROGRESSIVEGROCER: Prior to Regina Herzlinger's presentation at the 2005 FMI Midwinter Conference, how involved were you in managing or improving Safeway's employee health care programs?

SB: Let me give you a little history. A couple of years before that, we were looking at health care. Our cost was approaching approximately $1 billion, and was escalating at double-digit rates.

I asked one of our high-ranking retail guys to take a staff job in the corporate office, and one big issue assigned to him was to reinvent our approach to health care. As it sometimes happens, he was working on this and other issues, and then someone else left the company. So he was promoted to division president. Needless to say, we didn't make too much progress on the health care issue.

I attended FMI Midwinter in 2005 and listened to the presentation on health care made by Harvard Business School professor Regina Herzlinger. Having a background in economics, a bachelor's, and a master's degree, I was intrigued by her presentation. Her whole concept was simple in that currently market forces are not allowed to work in the health care sector -- and they should be. By bringing them to bear on this sector, costs would go down and quality would go up.

As a trained economist, this really struck home with me. My thinking was to create a market inside of our company, get people to behave differently, and get costs to go down.

In addition to listening to Regina's speech, I had one follow-up phone call with her that lasted about 30 minutes. That was the end of our interchange. In fact, she may not even remember that we had the phone call. Nonetheless, her presentation at FMI was the catalyst for an objective I had in 2003, and it was in 2005 that we began to reinvent Safeway's health care program with our nonunion work force.

An eye-opening discovery that we made along the way was that the health care costs that we bear are driven by behavior, and not genetics. That's when we designed a plan that rewarded people for good behavior.

We created a market inside of Safeway. It wasn't a complete market, but that's what my health care reform is about. We knew that even within the four walls of Safeway we could educate the work force and let people know that behavior really does matter.

While we didn't really expect that our costs would go down, we thought we'd at least contain the inflation.

Amazingly, costs did go down, yet we'd put in only a modest level of incentives.

Today, based on our experience, we now believe that reducing the nation's health care costs by 25 percent is an easy walk in the park. Frankly, maybe the real number is between 25 percent and 50 percent.

At Safeway we'd built a template to cover cost inflation and coverage, and we felt we should definitely be dialoguing with policymakers.

Policymakers think it's too expensive to help the 47 million Americans who are uninsured to get insured. Based on our calculations, that would cost our country 10 percent. If our country were to engage in the type of plans like we've done, it would be self-financing.

Business health care costs would go down, and we'd be more competitive globally. The global competitiveness issue says we should all be interested in what's happening globally. Now policymakers are actually getting around and doing something about this.

The vast majority of businesses can't claim they've cut costs and improved quality.

PG: How much support/involvement has Safeway received from national or state food industry trade associations regarding your health care initiatives?

SB: Only recently did we form a health care coalition, and we’re in the process of getting people to join and sign up for some early principles. In about five weeks’ time [as of early April], we’ll have at least 50 companies on board, and we should have about 100 on board within the next six months or so.

In addition to giving the talk that I gave to my colleagues at FMI Midwinter, I've also presented our program to 60-plus c.e.o.'s who attended GMA, and since then I've talked to the Business Council.

Overall, I've talked to at least 300 companies and 200 c.e.o.'s. No doubt, it's a compelling argument for doing something and getting people involved.

PG: Which constituents were represented on your multidisciplinary task force? Who represented the consumers and workers? Were local hospitals/medical facilities involved?

SB: We've put together a c.e.o. task force that includes health care providers, pharmaceutical representatives, the insurance industry, and practitioners, who are on the receiving end of health care. It's a small group. I believe that if you're going to invent, you invent with five to eight people.

PG: What, if anything, would you have done differently in designing Safeway's incentive-based health care benefit program?

SB: I'd probably move a little faster. We've not yet put into place all the incentives we intend to incorporate into the Safeway plan. We're sort of wading into the water kind of ankle-deep, as if it's frigid.

I met yesterday with our internal team, and asked them to decide what we’ll be adding to the equation next year, and stressed the importance of meeting sooner on this rather than later. There's a lot more we can do to create this market-like behavior inside of Safeway.

As we talk to other companies, we let them know that we don't have a monopoly on good ideas, and suggest that we get our teams together to share what they've done, what we've done, and let's get a best practices thing going.

Interestingly, most companies that we've talked to so far have flatlined their health care costs, yet we've experienced a tremendous decrease.

PG: What major roadblocks did you face in designing/launching the new program, and how were you able to move beyond the roadblocks? What difficult hurdles likely lie ahead?

SB: When we first launched in 2006, we really marketed hard the change in the program, and the benefits to the employees. We got a lot of people to sign up, mainly because there was a strong financial incentive and we lowered their premium.

First off, 45 percent signed on, and last year our participation rate was 71 percent. We predict that we'll achieve at least a 90 percent participation rate during the next year. After all, our people saved money, and the quality of service improved.

PG: What advice can you offer to organized labor regarding the better management of health care?

SB: I think that the core principles that we'd advocate as a national solution are principles that organized labor can buy into. Our objective is twofold: drive down costs to improve affordability, plus we get everyone in the country covered.

Those, too, are objectives of organized labor. They and we alike have been exposed to double-digit inflation, and as a result wage increases have been few and far between.

If we get costs under control, we free up more money to be more competitive, and free up money to be used for wage increases. Our interests are totally compatible on this issue.

We've been working on the local level with bargaining, and between contracts with labor leaders on health care redesign. Truly, there's no shortage of good ideas from both sides of table.

In addition, we’re working very hard at the international level. We're putting together information meetings where everyone shares everything they know on how to reinvent health care.

The same basic principles we see working in a nonunion structure will work across an organization to drive costs down.

PG: What steps do you feel a single-store operator can take to improve the quality/cost of health care benefits for associates?

SB: Keep in mind that most single-store operators aren’t self-insured like Safeway. However, if I were a single-store operator, I'd go to my insurance provider, or I'd go to a couple of different providers, and say, "Look, we understand that behavior really matters with regard to health care costs, and we'd like you to design for us a plan that rewards good behavior."

We're dialoguing with a lot of insurance companies right now on this issue, and in fact, we're working with one that has a ready-made plan.

PG: Are there any criticisms of the new plan? If so, are they, in your mind, valid criticisms? Please share your thoughts on how best to handle the skeptics, those who say, "This is never going to work."

SB: Again, the plan is evolving. It's not like we have this plan that you can airlift into every situation. I can assure you, however, that our "behavior matters" health care plan has everyone excited. It saves money for the employer and employees, policymakers like it, and so do unions because it's getting costs under control to free up money for other things.

Overall, I wouldn't categorize any comments on the plan as complaints, but in the "Gee, that’s a good idea" category.

Let me give you an example. On our health questionnaire that’s completed by participating associates, we've identified several folks who are in the pre-diabetic risk category. One of our employees pointed out to us that we really don't want people to go down that path, so they're advised by their doctor to get advice from a nutritionist.

Our plan covers the cost of the nutritionist, knowing that long-term it will benefit the associate. Certainly we can justify the expense when it gets people out of the pre-diabetic plan.

Keep in mind that the Safeway plan is not a high-deductible plan. In the end, the most any family is exposed to in a given year is $2,000. Most plans don't cover the full array of prevention that we do. Some of the changes we'll make downstream will include an incentive for participating in the preventative services. It says to our associates, "Unless you do these things, you'll make it hard for yourself and the company."

PG: What, if anything, surprised you the most in designing and launching Safeway's improved health care initiatives?

SB: I didn't know that we'd get such an immediate cost reduction. The prevailing thought was that we'd see cost benefits downstream. But we got the benefit immediately. That was one of the big surprises.

As I learn more about health care, let me share with you one story that gives you the sense of why I believe a 25 percent cost savings is a walk in the park.

During a meeting in Las Vegas with hotel management/workers, there was a gentleman who stated that if consumers are going to act like real consumers, and health care costs are going to drop like the cost of flat-screen televisions and cell phones, then they'll need information on quality.

For the group's 120,000 members, cost and quality information was made available based on the local geography, including which doctors were most efficient, which ones did too many tests or didn’t follow protocol, etc.

Based on this information, it was decided which doctors should be used and shouldn't be used. Those with poor-quality ratings could be used, but their services would be considered out of network, and the employee would bear 40 percent of the costs.

As a result they agreed to share the cost savings with employees. They saved 25 percent and gave big raises.

One of the ideas we're advancing is to do something similar for Medicare, which, by the way, covers 30 percent of the people living in the United States. We need to make quality data easily accessible for those covered by Medicare, a "Consumer Reports on Health Care," if you will, that does not exist today. Currently there's a subcommittee working on this in the federal government, and there's a fair amount of support for it. I believe we'll get this done.

PG: What about the new Safeway program are you the most proud of?

SB: We're proud of the fact that everybody wins. Costs go down, care goes up, people get healthier, and we've discovered a template for a national solution. There are few opportunities in life to be a part of something this big, and I'm proud that Safeway is leading the way.
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