Financial Health Incentives on the Rise, but Design Is Key

Employers increasingly are using financial incentives to steer employees toward healthy lifestyles and reduce health care costs, according to a recent survey. But the effectiveness of those incentives depends on how they are used.

About half of the 453 employers surveyed by Watson Wyatt and the National Business Group on Health say they use financial incentives to encourage healthy behaviors, such as quitting smoking or losing weight. Seventy-nine percent of employers surveyed say they will offer such incentives next year.

“Three years ago, these incentives were in very limited use,” says Shelly Wolff, practice lead for health and productivity at Watson Wyatt’s Stamford, Connecticut, office. “There’s been a significant change in how you design health plans to reinforce behaviors and accountability for decisions you make every day.”

This sentiment was echoed in a separate study by the Center for Studying Health System Change, which concluded that employers believe financial incentives are necessary to encourage employees to take more responsibility for health care decisions and costs.

Wolff says the best-performing companies in the survey that use financial incentives saw health care costs increase 1 percent in the past two years, compared with the average of 6.2 percent. Poor-performing companies, meanwhile, saw health care costs rise by 10 percent.

Financial incentives are most effective when designed as part of a larger strategy intended to treat patients more like health care consumers, Wolff says.

High-deductible health plans are the clearest examples of ways employers are trying to change employee behavior by making them more responsible for the cost of health care. But like other incentives, they are best utilized when employers also provide quality and cost information for doctors, hospitals and other services.

Nearly half of best-performing companies in the survey cover the entire cost of preventive health care services and cover the use of retail health clinics for primary health care; about 40 percent offer financial rewards to employees who participate in disease management and smoking cessation programs. Thirty-one percent require plans to disclose the price for medical services. And about a quarter reduce co-pays on drugs that treat chronic illnesses.

Incentives can work, but they also can backfire. Some employees may feel their employer is impinging upon their privacy by collecting health information. This distrust may ultimately affect the validity of information collected on health risk appraisals, one reason why employers may have more success rewarding healthy behavior than punishing unhealthy behavior, says Debra Draper, associate director at the Center for Studying Health System Change.

These concerns, however, have not hampered employer enthusiasm for health risk appraisals, which are now used by 83 percent of employers, compared with 65 percent in 2006, according to the Watson Wyatt survey.