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An Outcomes-Based Incentive Program That Works


CORRECTION: An early posting of this blog, using information gathered in interviews, misreported Graco healthcare spending. Those figures are corrected here.

At Graco, a Minnesota-based manufacturer founded in 1926 that employs about 2,600 workers, its outcomes-based incentive program works. Why? Because at Graco, senior leaders “walk the walk” not just “talk the talk.”

Graco is a publicly-held company, listed on the New York Stock Exchange, that manufactures pump and spray equipment for fluid handling in the construction, manufacturing, processing, and maintenance industries.  Pat McHale, the company’s CEO, worked his way up the corporate ladder, starting on the factory floor as a parts assembler. Because of his long tenure with the company, he possesses what is referred to as “street cred” among workers who view him as one of their own.

Graco established its wellness program in 2008, when healthcare costs began to rise at double-digit rates and foreign competition became stronger.  McHale asked David Ahlers, Graco’s vice president of human resources, to accelerate the company’s health promotion efforts as a defense against external threats to the business. The company’s management team was driven by data, and results mattered to them. Ahler’s challenge to the newly hired wellness and safety manager Kim Beck was, “How will this program help me sell more pumps?”

To qualify for lower insurance rates, employees were asked to complete an annual health risk assessment (HRA), participate in a biometric screening, review their personalized feedback report with a health professional, attend health education classes on-line, talk to a health coach by telephone at least four times if they were at high risk for an illness, be tobacco-free, and complete a dental check up. Each of these activities earned employees “points” that could be redeemed for gift cards and medical premium reductions. Additionally, medications to treat certain common medical conditions were available for low or no cost to employees through a value-based benefit design (VBBD) medical plan.

Graco’s management wanted more. They heard that some employees simply signed onto the website, began the educational video, and walked away from their computers, but still earned credit for attending a class. Because senior leaders were results-focused, they began an outcomes-based incentive program in which participation in the program was insufficient to gain credits; workers had to improve their health in a demonstrable manner.

McHale met with employees at small “town hall” meetings to explain the new program. The CEO began each session admitting that he needed to lose weight and that all senior managers would be expected to lead by example. He also explained that because employees were part owners of the company, through employee profit-sharing and stock option plans, they all had a stake in keeping company expenses, especially healthcare costs, low. After all, he explained, the company was self-insured, which means that every dollar paid for medical care (a total of $15 million a year in 2008) is a dollar not spent on employee wages and other benefits.  

That strategy worked. Meeting employees personally and explaining the program to them in plain language was a critical success factor; employees knew the CEO was “one of them,” someone who started on the shop floor. McHale explained that the company was not there to be someone’s “big brother,” but rather to provide the needed tools and resources for people to use so they could take better care of themselves and their families. He reminded workers that their retirement could last 25 to 30 years and that Graco provided a pension, “so, be smart and use it to the fullest extent possible.”

Graco also took steps to lessen concerns that the program was coercive. McHale insisted that in situations in which an employee’s physician confirmed that the worker was doing all he or she could do to improve health (e.g., lose weight, lower cholesterol, quit smoking) but was unsuccessful, the worker would still be granted a premium reduction

 The incentives offered were significant. Workers could save more than $1,000 a year on medical insurance if they met their health goals. Spouses were also invited into the program and earned the employee additional rewards if they were non-tobacco users, completed a health assessment, and submitted biometric data.

Also important to the success of the program was establishing trust between labor and management. Initially, many workers feared biometric testing would be used to detect illegal drug use or that sensitive health information would be shared with supervisors who evaluated workers’ performance. Graco needed to reassure workers that the data would remain confidential and collected by a third party. Insurance premiums would only be modified using a point system and no individual data would be provided to managers.

Graco provided several resources and programs to help workers navigate their health improvement journey. The company hired a full-time health consultant -- a registered nurse to guide employees in weight management, physical activity, proper nutrition, and achieving a healthy lifestyle. The firm paid for on-line Weight Watchers. Employees were given financial support to enter active events such as marathons and sports leagues.

What about results? Participation rates increased from 60% in 2008 to 74% in 2012, even though some employees work the night shift, when learning about and practicing healthy habits is a challenge

Importantly, the health risk profile of workers improved significantly from 2008 to 2012. Graco’s aggregate obesity rate dropped from 37% to 31%, while national rates increased at about a half percentage point each year during that time. Other significant improvements were recorded in controlling high blood pressure, LDL (bad) cholesterol, and triglycerides. Two risk factors did not improve over time, however: tobacco use, which stands at about 13%, and high blood glucose.

As for medical and pharmacy spending by the company, those increased an average of 4.4% for employees and dependents from 2008 to 2012, averaging about $302 per member per month during that time period. Also impressive was a reduction in safety incident rates, which dropped from 5.7% in 2008 to 3.6% in 2012, saving the company an estimated one million dollars.

When surveyed, employees reported that financial incentives have prompted them to make healthy choices; 92% of respondents agreed that Graco’s outcomes-based incentive program inspired them to check their biometric measures and attempt to bring their laboratory values under control. As one employee noted, “I pay attention to the program because we’re talking about ‘real money’ in your pocket for achieving certain health goals.” Turnover at Graco has remained low, averaging 4 to 5% a year compared to industry averages of 11-13%. In terms of bottom-line performance, the company’s sales revenues have doubled since 2009 and operating margins are “very healthy,” according to Ahlers.

Graco is a case study of an outcomes-based incentive program that works because it is well-articulated, viewed as fair by employees, and aligned with the overall company culture, which is focused on results. Graco executives insist that their program would not work if it were seen as outside of the company culture. What matters to them is that the program is organic, uses internal staff, and is driven by a management team that believes it needs to practice what it preaches. Senior managers pride themselves at being physically fit, non-smokers, and practicing a healthy lifestyle. They also support efforts by their employees to follow suit – to live a long, productive, and healthy life, with ample financial security to fully enjoy it. 

Written with support by the Robert Wood Johnson Foundation