PHOENIX—Safeway Inc. has reduced its health care cost increases by more than $150 million since 2005 using an approach that closely resembles how auto insurers rate drivers.

Under Safeway's Healthy Measures program, employees “earn” the lower rates for health care coverage—up to 20% off the cost of single coverage—by meeting certain criteria: healthy weight, no tobacco use, controlled blood pressure and controlled cholesterol.

Employees who fail to meet the criteria at open enrollment for the consumer-driven health plan are eligible for refunds on their higher premiums if they pass the tests at the next year's open enrollment.

Ken Shachmut, executive vp of the Pleasanton, Calif.-based grocery store chain, described the program during a keynote address at the National Business Coalition on Health's annual meeting Nov. 8-10 in Phoenix.

“If you and I were both 35 years old and lived in Pleasanton, Calif., and we both drove a Camry sedan, and you've been a great driver ever since you turned 16, you can get a full suite of insurance for $750” a year, he said. But if “I, on the other hand, am a lousy driver, I can buy that same suite of insurance, but it will cost me over $1,500.”

“No one in this room, I will wager, thinks that's unfair,” he said. “We believe the same philosophy holds true for health care. If you buy the argument that behavior is important, it's a travesty that most insurance plans don't provide incentives to motivate changes in behavior, and few of them have cost and quality transparency.”

To explain to Safeway's employees why those four health conditions were targeted under the Healthy Measures program, Mr. Shachmut compared them to excess costs incurred in the firm's core business.

“In the grocery industry, we have this phenomenon called "shrink.' It represents anything we buy that we can't sell. It might be a bunch of bananas that rots and we can't sell it. It might be a can of soup that is dented. Or it might be a pack of razor blades that was stolen from one of our stores and resold at a flea market. All that is "shrink,'” he explained.

“If I told you three-quarters of the "shrink' was resident in four items, then you would understand pretty readily that I could afford to put one person on a supply chain for each of those four, from the grower's field to my shelves, and I would figure out a way to avoid "shrink,'” he said.

“That's the situation we think we have in health care because so much of it is about behavior and so much of it is concentrated in such few areas that we developed incentives to...improve behavior in those four disease states,” Mr. Shachmut said.

Using its claims data, Safeway quantified the additional health care costs associated with those four health measures: An employee who smokes costs $1,405 annually more than one who does not; $1,400 for obesity; $645 for lack of exercise; and $600 for uncontrolled hypertension.

Safeway also did some comparison shopping for certain common medical procedures and discovered that the fees charged by facilities where the procedures were performed varied significantly more than the fees charged by physicians and other providers.

Based on this information, the company adopted what it called a “reference price,” and then told its employees that was all the company would pay for those particular procedures. If the facility they used charged more than that, they would have to pay the difference, and that out-of-pocket expense would not be applied toward their annual deductibles.

“It should not surprise you that...we've had no colonoscopies in the greater San Francisco area over $1,500,” Mr. Shachmut said.

Moreover, because of the Healthy Measures and transparency initiatives, Safeway's 2009 health care costs are projected to be just 2% higher than 2005, and next year will be just 1% more than 2005. This translates into $150 million in cumulative savings since the program began in 2006 and is expected to hit $230 million next year.

“So, technically, we flat-lined our costs without cost-shifting,” Mr. Shachmut said.

The company also has shared about 60% of the money saved to reduce employee premiums.

He suggested that if Safeway's program were used nationwide, the percentage of the gross domestic product spent on health care would return to 1980 levels by 2020.

“We don't have to look at taxes on hospitals. We don't have to look at taxes on pharma. We don't have to take money away from Medicare. There are plenty of opportunities (for cost cutting) in the current system,” he said.