A logical and frequently used method for giving employees incentives to manage their health and risks or diseases better is the use of higher premiums for the unhealthy and lower for the healthy, or with high-deductible health insurance, higher deductibles for the unhealthy and lower for the healthy. Premium carrots/sticks are limited by HIPAA regulations to 20% of the costs of covering employees, so there is plenty of “wiggle room” there. But the Employee Benefits Security Administration recently issued guidelines indicating that group health insurance: “…must not differentiate among individuals in eligibility, benefits, or premiums based on any health factor of an individual”. [V. Knight “Wellness Programs May Face Legal Tests” Wall Street Journal Online Jan 16, 2008]

This merely closes what had been a loophole or way around the HIPAA guidelines, rather than further restricting the use of incentives. It also clearly shows that so-called “positive” incentives, or “carrots” such as reduced premiums or deductibles for the healthy amounts to “negative” incentives or “sticks” for the unhealthy. Many employers, for example, have raised employee premium contributions for all employees, then offered ways that healthy employees can gain rebates or reductions by meeting certain healthy behavior, wellness participation, or health status standards.

In general, it is becoming increasingly difficult, if not impossible to differentiate among employees (offer carrots or sticks) based on their health status. Obesity is frequently deemed a “disease” based on genetic predisposition, for example, rather than a lifestyle choice. Smoking is often considered an “addiction” eligible for medical treatment, but not an acceptable basis for differentiation. And in group insurance, at least, having a chronic disease (“pre-existing condition” is not an acceptable basis for either “underwriting” = denying coverage, or higher premiums, though it is in individual insurance.

The use of high-deductible health plans, per se, offers incentives to employees in that unhealthy members are far more likely to have to spend their own money to meet the deductible, which could amount to thousands of dollars per family, than are healthy ones. By offering defined contribution rather than defined benefit insurance coverage, in the form of “vouchers”, while individual employees have to purchase individual insurance could offer even greater incentives for employees to manage their health, assuming insurers could price their plans differently for healthy vs. unhealthy applicants under such arrangements.

But there is also a simple and straight-forward method for differentiating among employees that would presumably pass muster in all but strongly union-dominated industries and firms – paying for performance (P4P). It is both a long-recognized belief (Adam Smith wrote about it in the 18th century) and a recently demonstrated reality that healthy workers produce more and perform better than do unhealthy ones. Obese workers, for example, have been found to have far more absences and dramatically higher workers compensation costs than do their healthy-weight peers.

Smokers who are truly committed to frequent smoke breaks automatically reduce their productivity and performance, since these breaks must usually be taken away from their workstations. Some have even suggested that since smokers get more “breaks” then non-smokers, the non-smokers should be granted “equal time” privileges, preferably to use them for health-promoting activities such as brief naps, exercises, or other efforts that will improve their health. Not only has “unhealth” been shown to impair productivity/performance (P/P), but improving health, particularly by reducing the number of unhealthy behaviors or conditions affecting each individual, has been shown to improve both, when measured.

In effect, a pay-for-performance system of worker compensation will function as a carrot/stick element while differentiating among workers on the one basis that has always been accepted and widely used – their P/P value to the employer. This will require, of course, that employers create P4P systems that measure P/P far better than most do now, however. The best incentives are those that can match changes in P/P value as soon as they occur, rather than the common annual performance reviews used to determine salaries and wages in general.

One of the other rules under which health incentives operate is that when employees qualify for the limited incentives allowed under HIPAA because they quit smoking, or participate in some effort to improve their health, there must be “equal opportunity” for other employees who already do not smoke, or are healthy to begin with, to qualify for the same kinds of incentives. This could automatically makes it necessary to pay all employees the same incentives, rather than only those who participate in “reform” efforts.

P4P gets around that requirement as well, since as yet no regulations require paying employees who are poor performers the same as those who are top performers. Moreover, P4P systems have been repeatedly shown to improve productivity of the workforce, compared to the far more common hourly wage systems. One employer achieved a 44% improvement in total production and revenue through switching to P4P, for example, with only a 10% increase in overall compensation. [E. Lazar “Performance Pay and Productivity” American Economic Review 190:5 Dec 2000 1346-1361]

Moreover, the same employer found that in the first year of the P4P system, worker turnover was affected in a positive way, with turnover declining among high performers, and increasing by more than 10% among lower performers. With P4P systems, it is often in low-performers best interests to seek employment elsewhere, where their low performance will not be so directly and heavily penalized. By contrast, it is in high-performers best interests to remain where they are directly rewarded for their better performance. Over time, this dynamic will automatically increase the number of employees in the workforce who are higher, while decreasing the number who are lower performers, and increase the organization’s overall performance in that manner, as well.

An employer could easily couple a P4P wage/salary scheme to an employee health management (EHM) strategy. The measures used to determine P/P for pay purposes would serve as a more credible basis for gauging worker impairment levels based on their health – or on any other factor for that matter. By rewarding individuals who improve their performance automatically when their health improves, or for any other reason for that matter, the EHM/P4P combination could eliminate the need for other incentives, thereby saving costs for the EHM program, and make the performance-based incentives match the added value that healthier employees deliver.

An added element could be making supervisors and managers accountable to the same degree, with P4P salaries or bonuses based on the performance of the employees they manage. This should stimulate managers’ efforts to support EHM efforts, once they believe or have been shown how much such efforts improve performance of their teams, units, or departments. It should also stimulate managers to work on maintaining or improving their own health, since that will both serve as a useful role model function, as well as improve their individual performance.

EHM efforts, themselves, should be integrated with other management efforts, in workforce training and development, for example, work/life balance, morale and motivation building, to improve both the effectiveness and efficiency of performance improvement efforts. While this necessarily complicates the allocation of credit among such programs when performance improves, this should be more than compensated by the degree of improved performance achieved across the workforce and the organization as a whole.