Companies Get Tougher with Employees Who Smoke

Many companies use quiet incentives to encourage desired employee behavior, such as losing weight. NotMacy’s (M). Beginning on July 1, workers at the department store chain who admit to using tobacco will be surcharged $35 a month, or $420 a year, for health coverage. The extra cost will be deferred only if smokers enroll in a free quit-smoking class. Their progress will then be reviewed after six months.

Instead of using carrots to encourage smokers to kick the habit, businesses increasingly are wielding sticks. AtPepsiCo (PEP), smokers pay an annual $600 insurance surcharge, while publisher Gannett (GCI) charges $60 a month. Some go even further: Union Pacific (UNP) andScotts Miracle-Gro (SMG) refuse to hire smokers.

Between medical spending and productivity losses, smoking costs the U.S. more than $193 billion a year, says the U.S. Centers for Disease Control and Prevention. Tobacco use is responsible for one in five U.S. deaths. For employers, a smoker is 18 percent more expensive than a nonsmoker, says Cathy Tripp, a consultant at Aon Hewitt (AON).

That cost gap likely will widen beginning in 2018 when, under a provision of health reform legislation passed last year, companies with health plans that spend way more than average will have to pay an additional federal tax. That may push some to reduce employee coverage. “Employers have two choices: cut benefits or cut the trend” of rising medical costs to avoid the levy, Tripp says. “It has made all of them a lot bossier when it comes to employee lifestyle choices.”

Businesses also are looking at how they can get workers to keep closer tabs on their health. Scotts Miracle-Gro cuts insurance rates up to $60 monthly for workers and spouses who get their weight, cholesterol, and blood pressure checked regularly. Union Pacific offers free fitness club access.

Michael Wood, a benefits consultant at Towers Watson, says smoking is employers’ most effective “wellness” target since smoking cessation programs have a relatively high 25 percent success rate. “Employers see wellness as one of the last levers they can pull to try to control health-care spending,” Wood says. “You have to get to the root causes of the spending if you want to cut the trend from the 7 or 8 percent [increases] many employers see annually to something closer to the 2 to 3 percent inflation in consumer spending.”

The tough tactics can have an impact: Scotts Miracle-Gro says its health premiums have risen at about half the U.S. average since implementing the smoker hiring ban. The strategy can also ruffle feathers. “Some people like the carrot, and some like the stick,” says Ken Bordieri, president of Local 1-S of the Retail, Wholesale and Department Store Union that represents Macy’s employees in New York-area stores. “I wish Macy’s had stuck with carrots.”

Policies that block employment to smokers or charge extra for insurance discriminate against low-income and less-educated workers, says Dr. Cheryl Healton, head of the American Legacy Foundation, the health advocacy group created as part of the civil settlement between cigarette makers and 46 state attorneys general in 1998. The smoking rate is four times higher among teens not bound for college than for those pursuing higher education, and lower-income and less-educated adults also are more likely to smoke, she says.

The Society for Human Resource Management estimated that 59 percent of companies offered wellness programs in 2010; 28 percent paid bonuses for quitting smoking, losing weight, or achieving health goals; and a 10th provided insurance discounts for not smoking, getting a health risk assessment, or joining a weight-loss program.

Health-care companies have been among the most active at tackling smoking. The Cleveland Clinic banned the use of tobacco in 2005 and stopped hiring smokers two years later. Job candidates, including doctors, must have their blood tested for nicotine. Says Toby Cosgrove, chief executive officer of the clinic network: “If we want to be a model of health care, then we as an organization need to show our patients what a healthy lifestyle means.”

The bottom line: With new taxes ahead for companies with higher-than-average health spending, employers are targeting U.S. adults who smoke.

By : Wechsler .....  is a reporter for Bloomberg News.