The fairness of health insurance incentives


Wanna make a fast buck? Quit smoking. According to the National Business Group on Health, which represents large employers including Wal-Mart and Wendy’s, about 68% of its members either offer a discount of several hundred dollars on health insurance premiums to employees who quit smoking, or provide other incentives or penalties to make it happen.

The evidence is mixed on how well incentives like these work, but large employers are already embracing them to encourage good diets and exercise — with an eye toward keeping their employees from missing work and to keep health costs down. The revolution began with the approval of the so-called Safeway Amendment as part of President Obama’s healthcare reform: This allows employers to provide employees reimbursement of up to 20% of insurance premiums (rising to 30% in 2014 or 50% with special approval) if they participate in reasonable wellness programs.

The amendment got its name because of the outspoken support of Safeway Chief Executive Steve Burd, who wrote in a 2009 Wall Street Journal opinion piece that his company’s Healthy Measures program was proof that incentives could cut our nation’s healthcare costs by 40%.


Some of Burd’s claims, including the assertion that Healthy Measures had kept costs from rising, later proved to be not quite true. Now many critics say poorly designed wellness programs can introduce inequity into the healthcare system — when healthcare reform was supposed to reduce it.

Read on for two nuanced takes on the issue.

Wellness incentives are key but may unfairly shift healthcare costs to employees

Harald Schmidt is a health policy expert and Harkness Fellow at the Harvard School of Public Health in Boston, working on personal responsibility and health incentives.

“In principle, I think wellness incentives are a good idea. But it all depends on how they are implemented. If the focus is on just reducing the cost of healthcare rather than improving health, then you may have a problem. The second issue is, we must make sure everybody has a reasonable chance of benefiting from incentive programs. We really have a problem if some find it much harder than others, and especially if we hold people responsible for things that are in fact beyond their control.

Firstly, the evidence on whether or not incentives work is very mixed. We have evidence in some cases that they work well in the short term — boosting vaccination rates, for instance. In the longer term, it’s less clear, and we can’t make sweeping claims that they work in all areas. We can only find out by trying, but we have to make sure this is done in a fair way.

“More troubling is the way these incentives can be structured. As it stands, the Safeway Amendment allows you to increase premiums for all employees by, say, $500. The employer will pay you back $500 if you meet certain targets; for example, if your body mass index is below 25. This is good for people who are already healthy: They have less-expensive premiums. It may also be a real incentive for those who want to change their behavior but don’t quite have the motivation. But there are a lot of people who have tried to change their behavior and regularly fail, diets being a prime example. They now face an increased contribution of $500. The person who is already healthy will benefit; the person with underlying motivation benefits. But those who try but just can’t meet standards? Tough luck.


“The problem is, these incentives can hold people responsible for things beyond their control. Certainly a bad diet can contribute to obesity, but there are other genetic and environmental factors as well. Obesity and income also correlates in a clear way. Since poorer people are more likely to be obese, there’s a potential double whammy: They may need to make higher insurance contributions and suffer the consequences of being obese.

“And this also brings up another interesting question: Why should people get an advantage if they are healthy? If your aim is to use money as an incentive to promote better health, does it really make sense to give premium discounts to people who are healthy already?”

Incentives can encourage good health and align the interests of the patient with those of the insurer and employer.

Kevin Volpp is a physician and the director of the Center for Health Incentives at the University of Pennsylvania School of Medicine and the Wharton School in Philadelphia.

“The reality is that we have a healthcare financing system that pays to treat people once they are sick. There’s a growing recognition that health behaviors are a major driver of premature mortality and healthcare costs. We need to rigorously test approaches that can better align incentives for patients with other interests of the health system, such as employers and insurers, so that resources go to keep people healthy. Wellness incentives are a piece of that and can be used in ways that provide positive feedback to patients.

“Most people tend to be not very good at making trade-offs between immediate gratification and future health benefits. There’s a probability that something bad will happen to them, but it’s not definite, whereas the cost of changing a behavior is immediate and often requires a lot of effort. An incentive program can be helpful in areas like smoking, where it can help change the equation so people weigh the future consequences of their actions.


“Indeed, in our study with GE employees, we provided financial incentives up to $750, which is approximately the annual cost difference between a smoking and nonsmoking premium. That incentive tripled the long-term smoking cessation rate, and in January 2010, GE decided to implement the program for all their employees.

“I believe that these programs can be implemented fairly. Lower-wage workers tend to have higher rates of the health problems we’re trying to fix: smoking and obesity. Consequently, offering programs for these conditions might disproportionately help lower-income people. I’m not sure why some people think they are going to be less likely to be helped. The same dollar amount may have a greater impact on a lower-income person.

“One of the things that is unanswered is whether, when you do a program, you should offer awards based on achievement of outcome or effort. The evidence out there suggests that it is less effective to pay for effort than outcome. There are lots of reasons you can imagine simply showing up at a smoking cessation program doesn’t work on its own — because many programs aren’t that effective. Rewards for achieving better outcomes, on the other hand, seem to work quite well.”