When most U.S. employers were only dabbling in the consumer-driven health plan concept, J.C. Penney Co. Inc. decided in 2010 to “pull off the Band-Aid.”

Although it had offered a CDHP as an option, more than 80% of its employees still were enrolled in a generous, self-funded preferred provider organization plan with copayments as low as $10 for doctor's office visits.

But the cost trajectory for the PPO plan was unsustainable for the Plano, Texas-based retailer, which was slow to rebound financially from the Great Recession.

“We had a significant issue not unlike any other employer. We were on a trend to double our health care spending over a five-year period,” said Matthew Harmon, benefits delivery and retirement director.

Because of J.C. Penney's demographics, “we were seeing significantly higher claims per capita in our population” compared with other retailers, he said. “Medical costs were going up 8% to 12% a year. We also had an older population. The average age of our employees is about 48, and 80% are women.” This compares with the average retail industry age of 34.

Since “we were not going to get younger overnight,” Mr. Harmon and his staff, with management support, decided the solution was to teach employees to treat health benefits like other consumer items.

“We shop for car insurance; we shop for a multitude of things in our daily lives; and the thing that's arguably the most important, we spend the least amount of time on. ... So we knew that we had to make a major paradigm shift. We needed to get our people to become more engaged and be better consumers of their health care,” Mr. Harmon said.

“There's the pull-off-the-Band-Aid approach, which we knew we needed to get to very quickly because health care costs were not shrinking, they were growing; and so the installation of a full consumer-driven approach with the right tools to help people be better consumers was something we felt very strongly about. That was for annual enrollment for the plan year beginning Jan. 1, 2010.”

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Today, 100% of J.C. Penney's benefits-eligible full-time employees are enrolled in a CDHP with a health reimbursement arrangement administered by UnitedHealth Group Inc. Employees have a choice of four deductible levels — $750, $1,150, $2,500 and $4,000 for single coverage, and double those amounts for family coverage — with premiums reflecting the amount of risk being taken.

“We started with $1,150 and $2,500 and then we learned that some people wanted to be able to budget more, so they were happy to pay more in premium for a lower deductible. Others who were young and invincible wanted a higher deductible for a lower premium,” Mr. Harmon said.

J.C. Penney contributes $200 to the HRA for employee-only cover, $400 for an employee and one dependent and $600 for family cover. Preventive care is covered 100%.

Initial responses from employees were “a mixed bag,” he said.

Some responded negatively, others positively. Others didn't realize the switch had even occurred until they used their benefits after the conversion, he said.

“It was pretty typical of a consumer-driven switchover, where the first couple of years were pretty tenuous,” Mr. Harmon said.

In the first year after the conversion, J.C. Penney saved $30 million, 15% off its previous annual health benefits budget of about $200 million. The rates of increase over the subsequent two years have been relatively flat. It also kept employees' premiums flat.

Mr. Harmon attributes much of the success of the CDHP conversion to J.C. Penney's provider partnerships. “When you have something as huge to change as consumer-driven, you can go design something, but if you can't administer it in a way that your team members understand it, then it's no good. If you can't communicate it to them, then it's no good. If you can't service them every day when they call in with questions, it's no good.”

UnitedHealth and Aon Hewitt, J.C. Penney's benefit plan administrator, “have been tremendous partners to help us deliver on those strategies in short time frames, and they've come to the table every time with ideas and experiences and book-of-business numbers to help us drive where we're going,” Mr. Harmon said.