The use of incentives in employee health management (EHM) has become widespread as employers recognize their value in promoting employee participation rates.  Incentives of anywhere from $25 to $600 can increase participation in health risk assessments and screening activities from an expected 10-20% of employees up to 80-90%, for example.  Incentives for participation in focused initiatives based on problems identified through assessment surveys and screenings are also common, with similar effects on participation rates among those targeted.

Of course, since incentives have proven so effective in promoting one desired behavior – participation in assessments and interventions – perhaps they can be used with comparable effect to change employees’ behaviors with respect to the EHM objective, itself.  Incentives for not smoking, or quitting tobacco use if present, are common, in the form of both rewards and punishments, with a number of employers refusing to hire smokers, for example.  Incentives for weight loss are common, with some up to as much as $50 per month for employees who achieve and maintain a loss of 30% of body weight. (www.incentahealth.com)  In this way, they function as both reward for desired behaviors and their outcome, and as a threat of significant lost income if the behaviors and outcome are not sustained.

The drawback for incentives is that they add to the costs of EHM investments, and thereby affect the denominator (amount of investment) as well as the numerator (amount of financial gains) used in calculating return on investment (ROI).  This will automatically reduce the ROI ratio, unless the payoff from the incentive yields the same ROI ratio by itself as does the EHM program, without incentives.

[To illustrate:  if the EHM program, per se, yields $3,000 in economic gains for a $1000 program investment, the ROI ratio will be $3:1.  If incentives are used, and add $1000 to the overall investment, making the total $2000, while increasing the amount gained to $5000, even though the net gain (gains minus investment) increases to $3000 from the original $2000, the ROI ratio will be only $5000/$2000 = $2.5:1.  The most logical investment decision, of course, would be the one that delivers the greatest net economic value while still yielding an acceptable ROI ratio, so the employer should choose the “with incentive” alternative, however.]

Economic consequences alone have proven to have a major impact on employees’ use of short-term disability income replacement claims.  The probability of a “disability event” among wage-paid employees in one study was calculated to range between <1% to 7% for male and female workers at different ages, when they had no income replacement at all (as roughly one-third of employees do) to between 20% and 28% if they had 100% income replacement. [W. Lynch & H. Gardner “Money Matters in Decisions about Disability” Health as Human Capital Sep 25, 2005]

Not merely the probability of filing a disability claim, but even the duration of the absence per claim also varied depending on the extent of income replacement.  For workers getting only 25-50% of their income replaced, 75% of them had returned from work after 50 days on long-term disability.  For those getting 75% or more of their income replaced, it took 50% more days, i.e. 75 days in total, for the same 75% of workers to return from disability leave. [W. Lynch & H. Gardner “Hoping for Absolutes in a Subjective World” Health as Human Capital, Sep 17, 2006]

Essentially, the probability of having a claim is roughly four times greater at high income replacement than at low/none, and the duration 1.5 times greater, meaning the overall cost to employers varies by a factor of six (1.5 x 4).  This is a comparable impact to that found for incentives within the normal range of $-0- to $250, which is roughly from 20% to 80%.  So perhaps it might work best to rely on incentives alone to yield the intended health lifestyle or behavior change that EHM investments are intended to produce. [W. Lynch & Gardner “Aligning Incentives” Health as Human Capital Jan 20, 2008 (hhcf.blogspot.com)]

Of course, there are serious difficulties with respect to paying incentives for employees to get them to change their health behaviors.  Some have been deemed to result from “addictions” or genetic variations, meaning that to pay those who change, but not those who merely participate in an effort to change, could be deemed unlawful discrimination.  Already, the federal government has indicated that if smokers are paid to quit, for examples, non-smokers have to be eligible for comparable rewards.

The same applies to health status results of EHM participation.  It could be claimed, for example, that obesity is a disease, or the results of genetic differences, which would make discriminating against the obese or for healthy-weight employees would also be deemed illegal.  But there is at least one form of discrimination that seems to be legal, though union contracts may limit even that – paying employees based on their productivity or overall performance.  Since EHM is intended, and has been shown to significantly improve employees’ productivity and performance, it could be that pay-for-performance systems, by themselves, would deliver sufficient incentives to yield both health behavior changes and improvements in motivation that would yield more than equivalent overall value.

Paying on the basis of performance on an ongoing basis — as opposed to subjective annual performance ratings, so that employees realize the benefits of improving their performance as soon as they do so, and based on metrics they accept – has been shown to dramatically increase productivity.  In one case, where workers were shifted from hourly wages to output-based pay, overall productivity increased by 44% in the first year of the new system.  And the cost to the employer for this improvement was only a 10% increase in overall worker compensation. [E. Lazear “Performance Pay and Productivity” American Economic Review 190:5 Dec 2000 1346-1361]

Of course, it might be that the effects of a boost in compensation based on expected improvement in health or motivation or both, thanks to an EHM program, would not be enough to achieve high levels of participation in such programs.  The rewards, after all, are uncertain, and result from a lengthy “value chain” stretching from employees enrollment and participation in the program to changing their health behaviors to improving their health, and then to improving their performance.  It might be necessary, or at least helpful to offer some kind of modest incentives for participation, alone.

But by focusing incentives on the ultimately desired outcome of improved performance, employers can calculate precisely what they will be getting for their investment.  The increases in compensation based on EHM-related improvements in output or performance can be calculated as a “gainsharing” of the value of those improvements to the employer.  The share might be as little as the less than 25% share in the above pay-for-performance example, or wherever the employer chooses.  But because it is a share of “found money”, it would automatically yield a positive ROI, the extent of which would be largely decided by the employer when choosing the gainsharing split.  (The costs of the EHM program, itself, would have to be factored in as well, of course.)

Employers who are skeptical of the financial benefits available in EHM could experiment with the performance-based incentive option, since it would require the least amount of incentives to try.  They could then add modest “intermediate” incentives for participating in the assessment process, or in a particular health initiative, to see how much difference that makes.  But by using a gainsharing approach, they should be able to both avoid the restrictions of government regulations, and the costs of high levels of incentives based on participation effort, alone.

In the long run, of course, extrinsic incentives may have diminishing impact on employee health behaviors, status, and performance.  On the other hand, since performance-based incentives would be reduced if performance declines, there would be the continuing effect of employees wishing to at least maintain the level of performance and compensation they are already getting.  People will often exert more effort to keep from losing something than they would to gain an equivalent value.