Predictive modeling "seemed like a gamble because it was a total unknown," says Mahoney. "But we knew that the standard actuarial models weren’t working for us."

To minimize the risk, Mahoney and Hom started with two pilot projects. To protect employees’ privacy, they outsourced the projects (see "A Premium on Health Privacy," opposite page). They hired DxCG to project future health-care costs by geography and to validate the 2001 budget. And they contracted with Medical Scientists to help identify the factors most likely to lead to an employee turning into a high-cost claimant.

Diagnosis: A Sickly Staff

Hom and Mahoney began meeting with DxCG in the fall of 2000. The following summer, Pitney Bowes turned over its pharmacy and medical claims data to DxCG, which ran the data through its sophisticated cost algorithms. These algorithms can forecast health-care costs for the coming year with much more precision than traditional actuarial models because they take more factors into account. DxCG provided insight into why cost increases varied by geography, enabling Pitney Bowes to fine-tune health plans by region.

The model flagged a looming problem in the New York City area where Pitney Bowes handles mailroom operations or maintenance for 21,000 customer sites. Although actuarial and underwriting models (such as those that factor in age and sex) predicted costs would rise there by just 2 percent, the DxCG model warned of an increase of more than 40 percent. A higher-than-average proportion of the employees in that area had diabetes, asthma or cardiovascular disease, and their medication usage patterns were a harbinger of high costs to come, according to DxCG’s model. If those illnesses aren’t managed carefully, says Mahoney, patients will get sicker and the cost to treat them will escalate.

Mahoney and Hom quickly launched education initiatives to encourage employees to better manage their health. They offered free or low-cost immunizations and health screenings, made sure that employees knew the location of the nearest walk-in medical facility and urged them to rely on it instead of the ER for routine medical care. A group of new employees in New York had previously been on Medicaid. "There are no copays and people use ERs when they could use a doctor’s office," Mahoney explains.

The DxCG model proved prescient: First- quarter 2003 health-care costs in the New York area were 30 percent to 40 percent over 2002 costs. But thanks to the education initiative, health screenings went up, ER usage was down and overall annual costs came in at just 1 percent above 2002 costs.