In addition to the advantages cited in “Productivity vs. Performance in EHM” posted on March 10, the combination of measuring and rewarding performance improvement can avoid many of the regulatory limitations and restrictions relative to the use of incentives in employee health management (EHM). For some reason, the federal government has tended to view the incentives that employers offer their employees for participating in EHM initiatives, making health behavior changes or health improvements as dangerous in some way, and has severely restricted them.

For example, the total value of incentives offered cannot exceed 20% of the total health benefits that the employer offers. Given employers’ general reduction in how much they offer in health benefits, this tends to not merely limit but decrease the amount allocated for EHM incentives. The feds also demand that all employees have “equal access” to all such incentives, meaning that non-smokers, for example, should be eligible for the same incentives as are smokers who enroll in a tobacco use cessation program.

While this is arguably the only way to avoid discriminating against workers who are already healthy, it will also greatly increase the costs of incentives to employers. On the other hand, it may help to prevent healthy workers from slipping into unhealthy habits, since by paying them healthy habit incentives, employers automatically increase the out-of-pocket costs of not maintaining them. This form of “stick” along with “carrots” is already used in weight loss programs, for example, where employees may get a monthly incentive for having lost some percentage of their body weight, which they would lose if they let themselves gain it back.

Incentives can also be troublesome in unionized workplaces, where union contracts tend to push “non-discrimination” even more than the federal government does. Unions also may oppose pay-for- production wage adjustments, for that matter, or even the payment of incentives for any workers that are not paid to all. Moreover, incentives that are offered for specific health status gains, or even some behaviors, may be deemed discriminatory, when the status or behavior is deemed beyond the control of workers.

For example, there is a lot of pressure calling for the identification of overweight/obesity as a disease, rather than the result of overeating, thanks to research noting the genetic components that differentiate individuals with respect to weight gain. Smoking and alcohol abuse may be deemed addictions, forcing incentives to be limited to merely participating in an initiative aimed at reducing or curing the addiction, rather than for actually quitting. And since quitting the unhealthy behavior or correcting the unhealthy condition is the only thing that adds benefits to the employer, why should they pay an incentive just for participation?

While the justice and appropriateness of these kinds of restrictions and requirements for incentives may be argued, there is no question but that they severely limit what employers can do with them, and thereby what employers can achieve thereby. But the alternative of paying employees more based on their performance is arguably safe, though union contracts may restrict this practice as well.

Normally, employers are free to pay high-performing employees more than lower-performers. For example, when a windshield repair firm switched from a rigid hourly wage system to a pay-for-performance one, counting the numbers of windshields installed, the quality of installation and customer satisfaction with each job, it was able to increase overall productivity by 56% over four years, while payroll costs as a percent of sales fell from 12.3% to 10.8% (a relative decline of 12%). [B. Hall, E. Lazear, et al. “Performance Pay at Safelite Auto Glass” Harvard Business School Dec 6, 2001 (Case Studies 9-800-291 & 292)]

Pay-for-performance (P4P) has the advantage of achieving similar impact on overall productivity and performance, by itself. But it automatically creates an added incentive for workers to manage their health better, just as does the shift by many employers to high-deductible health plans and spending accounts that belong to workers. The difference is that P4P functions as a “carrot”, while the shift in health plans functions mainly as a “stick”. Moreover, it should enable employers to match the incentive to the actual economic value of the EHM result, since the result translates directly to improved performance.

Employers should be able to determine based on what they calculate as their economic gain from improved productivity and performance into a dollar amount that they are willing to “gainshare” with employees as incentives. They may also offer incentives just for participation, in order to get employees started, but employees, themselves, may eventually push for wholly performance-based incentives, since they should be significantly greater.

One of the devices that the windshield repair firm used in implementing its P4P system was to make a significant portion of the added pay a bonus, paid twice a year, rather than a weekly addition to workers’ paychecks. The workers who qualified for the “League of Superheroes” awards could get $7.60 extra per day/$38 per week for installing an average of 3.8 windshields per day with a 95% customer satisfaction rating, for example, meaning a six-month bonus of $988. Those who qualified for the top award, for 4.5 windshields/day and 97% customer satisfaction could get $18 extra per day/$90 per week, and a bonus of $2340 twice a year.

By getting this incentive as a bonus, employees got a major reminder of the cash they were earning, and in a form where it could be used for special, discretionary purchases, rather than routine expenses. They responded to this added incentive even more positively than to the P4P system as a whole. A similar approach could be used to identify a specific EHM “bonus” when improvements in health behaviors or conditions results in improved performance and economic benefit to the employer.

While it would take a labor lawyer to determine if there are any risks in adopting a performance-based incentive system to motivate and reward employee improvements in health that result in improved performance, the idea has significant advantages over other incentives. The incentive can far more easily be geared to a known value of the health improvement, since it will be expressed in performance improvement terms. And this should avoid most, if not all, the governmental restrictions and requirements relative to incentives for health behavior and condition changes, themselves.