Symptom: Feverish Costs

The company’s foray into predictive modeling was a journey born out of frustration. Mahoney, a trained epidemiologist, and Hom (both unabashed numbers geeks) had kept Pitney Bowes’ health-care expenses at two-thirds of the industry benchmark. Yet they were constrained by the limitations of retrospective data analysis. At annual review meetings, they got blank stares when they pressed health-care vendors to project costs for the coming year.

Their frustration reached the breaking point in 2000, when the company’s health-care costs spiked. "We knew our population was aging, we were seeing more chronic disease in the population, and the company was growing," recalls Mahoney. Pitney Bowes was expanding its Management Services division, hiring older workers and more workers from inner cities who didn’t have regular access to health care in the past. Mahoney believed that the cost problem would get worse if he didn’t act quickly.

About the same time when Mahoney saw costs jump, Hom was renegotiating a contract with one of Pitney Bowes’ HMO vendors. After seven years of negotiating favorable rates based on actuarial data, which showed that Pitney Bowes employees tended to be younger (and thus healthier) than average, Hom was stymied. The HMO negotiator had data showing that even though Pitney Bowes employees were younger, they were sicker. And he was using that data to justify a rate increase.

"I said to Jack, ’Son of a gun, every time I said something this guy had an answer. He must be doing something we’re not,’" Hom recalls. That something turned out to be predictive modeling.

The HMO was utilizing algorithms developed by vendor DxCG that apply pharmacy data to predict how sick a given population is likely to get in the coming year. If health plans could use predictive modeling to set their rates, Hom and Mahoney figured that Pitney Bowes could use it internally to forecast future cost spikes in time to take action to minimize them.

The two pitched the idea to CEO Michael Critelli, as part of a plan to control future costs and eliminate nasty surprises like the 2000 cost surge. And they promised a 5-to-1 ROI ratio after the first year. Having once served as head of personnel, Critelli is well-versed in the difficulty of managing health-care costs and often speaks eloquently on the pertinence of maintaining employees’ good health to the success of the company. Critelli agreed to sponsor two predictive-modeling projects in part because Hom and Mahoney had a good track record of keeping costs down. But he approved the investments with the caveat that Mahoney and Hom had to deliver predictable cost increases starting in 2001.