Using Financial Incentives in Health Care

Financial rewards are critical to changing behaviors. If individual willpower were good enough, we would not have growing diabetes and an epidemic of obesity in this country. The recently enacted health reform law allows the use of some current financial incentives and rewards to continue. In some cases it imposes new restrictions. In others it makes the employer’s options more liberal.

Rewards and incentives can take on many forms. The chart below the fold describes several options employers can use to engage employees in healthy choices. Both positive and negative incentives are possible. Existing rules allow a combination of rewards and penalties to exist within the same structure as long as the difference between the best and worst financial impact is within the ObamaCare allowances.

Employers will always be concerned about their “human capital.” High functioning employees lower the costs of unscheduled sick days, absenteeism, disabilities, workers compensation claims, and improve productivity. Here are typical options that employers can still use under ObamaCare:

Within these general areas, there are at least five ways to implement financial incentives:

1. Differential premiums — better choices are reflected in lower premiums.
2. Differential employee contribution rates — better choices are reflected in lower employee premiums.
3. Differential deductibles — better choices are rewarded by lower deductibles.
4. Differential cost-sharing — better choices are rewarded with lower employee cost-sharing.
5. Differential deposits to personal care accounts — better choices are rewarded with larger deposits to health savings accounts (HSAs) or health reimbursement arrangements (HRAs).

The new law does limit some financial incentive options for individuals, small groups, and large group plans offered through the government exchanges if they directly impact premiums for employees.  The law states:

“With respect to the premium rate charged by a health insurance issuer for health insurance coverage offered in the individual or small group market—

(A)  such rate shall vary with respect to the particular plan or coverage involved only by—

(i)   whether such plan or coverage covers an individual or family;

(ii)  rating area,

(iii) age, except that such rate shall not vary by more than 3 to 1 for; and

(iv) tobacco use, except that such rate shall not vary by more than 1.5 to 1; and

(B)  such rate shall not vary with respect to the particular plan or coverage involved by any other factor not (above).”

Small employers are defined as groups with 100 or fewer employees, or 50 or fewer at the discretion of the states.

At the same time, the new law allows both participation incentives and limited rewards based on specific health status outcomes. The new law increases the maximum for rewards based on health status from 20% to 30%. The act allows the Secretary of Health & Human Services to potentially increase the health status rewards to 50% of coverage costs.

For those plans that can use the full capabilities of rewards and incentives, their importance is likely to grow and expand as employers find new ways of controlling health costs.  A healthy employee is a more productive employee. 

A survey of employers by Towers Watson showed that 22% of employers provide financial incentives using bio-metric screenings (e.g. blood pressure, cholesterol, body mass index) and wellness appraisals. An additional 19% of large employers are moving in that direction. While only 3-4% of employers currently provide financial incentives based on meeting bio-metric standards, results oriented incentives are considered the next generation of consumerism to motivate employees to adopt healthy choices.

There are many companies developing the technology and compliance standards to assist employers. One such company offering the technology to monitor and administer reward programs based on bio-metrics is Bravo Wellness.  Forbes magazine highlighted Towlift, Inc., which selected Bravo Wellness’ incentive-based integrated wellness program.  After four years of this strategy, Towlift has experienced a reduction of 26% in per capita claims cost and steady improvement in employee heath measures.

Employers need to be cautious and flexible during these times of uncertainty. Do what is needed and what has been proven to work anyway.   Consumerism with rewards and incentives has proven itself over the last eight years to lower costs and improve quality of care.  The American Academy of Actuaries reports that healthcare consumerism lowers costs in the first year by 12-20% and reduces future trend increases by 3-5%.

Changes based on healthcare consumerism won’t have to be reversed even if ObamaCare is successfully challenged in court, a different Congress limits the law’s implementation, or a new Administration changes the regulatory rules.  Empowering patients and giving them good financial incentives is an American health reform idea whose time has come.

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