A Cookie Now or Cheap Health Insurance Later?

Today, about 80 percent of large employers in the United States offer some sort of financial incentive for employees to improve their health. These workplace wellness programs include anything from discounted gym memberships to smoking cessation programs, nutrition classes, wellness newsletters, and weight loss programs.

While incentives range from t-shirts and baseball caps to straight cash payouts, employers are increasingly linking participation in wellness programs to employees’ costs for healthcare coverage. While specific approaches vary, the basic idea is that if you participate, you pay a lower insurance premium or have lower deductibles or copayments.

In 2014 the Affordable Care Act expanded employers’ ability to reward employees for meeting health status goals by increasing the percentage of insurance premiums employers can offer to improve factors like body mass index, cholesterol, or for ending tobacco use (up from 20 to 30 percent). As employers increasingly implement incentives designed to reduce costs and improve employee health, the obvious question is – do they work?

Research shows that wellness programs can reduce healthcare costs. A 2013 review of 36 peer-reviewed studies found that for every dollar spent on wellness programs employer medical costs fell $3.27. Despite these findings, opinions are mixed about whether wellness programs result in real improvements in health outcomes. There’s also a debate about how to structure wellness programs – should they be incentives or penalties? Should rewards be tied to employees’ success in meeting health goals like weight loss?

A study published this year found that premium-based financial incentives did not promote workplace weight loss. Rather than concluding that financial incentives to promote health can’t be effective, the researchers argue that adjusting people’s health insurance premiums may not be the best way to motivate them to lose weight.

In fact, the same researchers found that cash incentives are good at promoting positive health change if they’re not tied to insurance premiums. Putting employees in groups and rewarding those achieving a monthly weight-loss goal works well if participants are offered cash and motivated by competition with co-workers. A similar study found that smokers are three times as likely to quit when rewarded by a $750 check at the end of the year.

Why do monthly or annual cash incentives work when equivalent savings off health insurance premiums don’t? The basic explanation has to do with discounting – we aren’t as motivated by incentives that are far off (later this year) or far away (hard to see). For most people, financial savings at the end of the year aren’t as enticing as a cookie right now. But savings off insurance premiums are also usually deposited directly into a bank account and bundled with your total paycheck. Most of us won’t review our account balance carefully enough to notice a $20 savings once a month.

These studies show that financial incentives can promote employee health, but only if they are designed well.