Health Incentives

Employee health incentives are good in theory, but behavioral economics says that they won't work as is.

There’s a provision in the Affordable Care Act that will allow employers to set up programs with wellness incentives. Employees will be able to receive rewards — such as rebates and waivers — by cutting back and eliminating unhealthy behaviors. But according to “Redesigning Employees Health Incentives — Lessons from Behavioral Economics” in the New England Journal of Medicine, the incentives are unlikely to work.

The incentives are an attempt to rein in health care costs by targeting health conditions associated with unhealthy behaviors, such as smoking, overeating and not exercising. And in 2014, employers will be able to use up to 30% of employees’ health insurance premiums to provide these incentives.

However, the authors argue that the success of these programs cannot be assumed for a variety factors such as timing and distribution. Because people make decisions by placing more weight on the present than the future, incentives cannot be delayed. For instance, a small year-end reduction in a person’s health insurance premium is unlikely to be a strong incentive to be health all year long.

Instead, “incentives should provide small but tangible and frequent positive feedback and rewards.” After all, many of the unhealthy lifestyles that these programs are trying to break are a result of the attraction to immediate benefits. Obesity is caused by overeating, but the eating is an immediate gratification, whereas the obesity won’t be a result until later on.

There’s also the issue that penalty programs might be more effective than reward programs. After all, a reward program “expends resources on people who are already performing targeted behaviors.”

The point of the provision in the Affordable Care Act is to target those people who need to change their behaviors — a penalty program would be more effective. However, reward programs are more favorable because they give a sense of cooperation that the employer and the employee are working together toward a mutually beneficial goal — an employee gets healthy and gets money back, and an employer cuts down on health care costs for employees.

So despite the growing popularity of reward programs to counteract rising health care costs, behavioral economics says that improvements need to be made to the incentive programs if they are to work properly.