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A Catch-22 in Employee Health Management

by Scott MacStravic

An increasing number of healthcare organizations (HCOs) are involved in employee health management (EHM). This may be an internal investment to reduce their own healthcare, workers compensation and disability insurance costs, absenteeism and presenteeism, staff turnover, as well as gain improvements in quality, customer service, market share, and other “balanced scorecard” performance dimensions. Or it may be an external marketing strategy aimed at improving employer relationships, to gain both added sickness care volume and direct EHM revenue.

Whether internally or externally focused, and certainly if both, HCOs have two separate, though related challenges in EHM:

* Promoting participation in and health behavior changes or maintenance among as many employees as possible
* Achieving and demonstrating positive returns on their own or their clients’ investments (ROI)

And there is a federal-government complication that amounts to a “Catch-22” with respect to these essential requirements for successful EHM programs.

Incentive Limitations

The federal government has decided that offering and paying incentives and rewards to employees for EHM participation and behavior change involves potentially illegal and unfair “discrimination”, and has issued regulations to prevent it. While the full wording of these regulations is characteristically turgid and requires the assistance of lawyers to interpret, the basic effect thereof is to make it illegal to discriminate between employees who succeed in adopting or maintaining healthier behaviors – vs. those who give it the old college try but fail to do so. [A. Gonzales “Regulations Change Way Employers View HIPAA” The Business Journal of Phoenix July 20, 2007]

In other words, as long as employees enroll in a smoking cessation, weight loss, blood pressure reduction or disease management program, or otherwise make an effort to improve their health behavior, they have to be just as eligible for “wellness” incentives as are those who have succeeded in such efforts, or have avoided the problem in the first place. Rewarding only those who achieve or maintain healthy behaviors would be unfair discrimination.

Of course, from the employer’s perspective, only those who achieve or maintain healthy behaviors are likely to create any cost savings or performance improvements, so paying just for trying will do nothing but add to employers’ costs for EHM efforts. It will also tend to reduce the effectiveness of incentive programs, once employees realize they don’t have to try very hard or make any real changes in their behavior to qualify for incentives. This, in turn, will tend to reduce employers’ ROI from such investments, their willingness to offer and pay incentives, and thus the effectiveness of EHM programs altogether.

Evaluating EHM Results

There is actually a simple solution to this problem. Since the reasons for EHM in the first place, and the success thereof relate to the financial cost savings and performance improvements that employers expect to gain therefrom, it would make sense to pay explicitly for precisely those savings and improvements, rather than “good faith” efforts to change health behavior. This will complicate any EHM effort, since employers are likely to invest in other methods for improving workforce performance, such as training, employee development, and similar human resources management (HRM) approaches not related to employee health.

But as long as the HRM investments, including EHM, produce measurable financial gains, employers will have the resources needed to justify incentives and pay rewards. And as long as rewards are linked to improvements in performance, there should be no problems with “discrimination” against employees who only make some effort to become healthier, but fail to improve either their health or performance. (Better to check with legal experts to be sure, but paying more for better performance has been okay for centuries, at least.)

The trick is to have in place a system for measuring employee performance that is reliable and valid as well as practical and inexpensive for the employer, and acceptable to employees. And that’s where the Catch-22 comes in. There are only a minority of industries in which “piece work” is the norm, and productivity/performance is routinely measured and rewarded. When this is an accepted practice, employers typically gain significant increases in productivity just by paying more for it, given the principle that what gets rewarded gets repeated. [M. LeBoeuf The Greatest Management Principle in the World G.P. Putnam 1985]

For example, when a windshield repair firm switched from an hourly wage to an output/revenue-based “pay-for-performance” (P4P) system, it gained a 44% increase in productivity in the first year of the new approach, while paying only 10% more in employee compensation. [E. Lazar “Performance Pay and Productivity” American Economic Review 190:5 Dec 2000 1346-1361]

Best Buy was able to use the fact that it could track and pay for its corporate headquarters staff on the basis of their order processing output to initiate a work-anytime/anywhere program that increased its productivity by 35% in one year, while reducing its annual turnover from 16.6% to zero. [M. Conlin “Smashing the Clock” Business Week Dec 11, 2006] Merely being able to measure individual worker performance opens up such opportunities, and the potential for using P4P as the incentive for employee changes in health behavior.

For employers in non-piecework industries, and for employees whose performance cannot easily be objectively measured, the normal approach to gauging their productivity and performance is subjective evaluations by their supervisors, or self-reporting by employees, themselves. Such self-reporting has been validated by comparing it to objective measures of productivity in jobs where this is possible, such as call centers. But that has been true for scientific purposes, for general evaluation of the impact of disease, health risk and other behaviors that impair productivity, and the determination of how much this impairment has been reduced through EHM programs.

If supervisor performance ratings were used in P4P systems, it would be doubtful if individual employees would find such an approach any more valid than they typically feel supervisor ratings are for annual evaluations and wage increases. And if self-reported performance were used as the basis for paying employees, it must be questioned whether individual employees would rate themselves accurately, given the great potential for “gaming the system” that self-rating would offer.

The Catch-22 is simply that while P4P systems enable employers, including HCOs and their clients, to motivate employees toward better health and performance through paying them more, rather than risking violation of federal regulations, unless they can measure their workforce performance objectively, they will be in essentially the same shape as with regulations. Instead of being able to game the system by pretending or making minimal effort to change their health behaviors and still earn incentives, they would, with self-rating, be able to game a P4P system through exaggerating the measures of performance used in P4P. Either way, employers could end up paying rewards, but not enjoying the improved performance needed to justify and pay for the rewards.

HCOs, themselves, have significant motivations already to measure the performance of their employees, given the growing amount of revenue available through third-party payors’ P4P systems, though the amount currently paid is relatively modest. Moreover, they can employ team rather than individual performance measurement, since it is often the team that is responsible for performance outcomes, while individual contributions thereto are much more difficult to gauge. This makes rewards for health or skills improvement even more indirect, since they have to work through teams, rather than directly on individuals.

It is possible, of course, that peer pressure within the teams would be sufficient to motivate individual members toward making whatever behavior changes would be needed to improve their health, or at least their productivity and performance. Since each member would be d