When Your Health Plan Says 'Shape Up or Pay Up'

American companies are pumping up their employee wellness programs in the hope that healthier workers will provide the heavy lifting necessary to control health insurance costs.

Workforce fitness and health initiatives have been around for decades, from off-site gym memberships to on-site basketball courts and softball fields. A wellness component has grown up to address such employee lifestyle risks as tobacco, alcohol and drug use, as well as chronic health risks such as cancer, diabetes, high blood pressure and heart disease.

However, a recent report from the RAND Corp. found that wellness programs to date have failed to significantly improve the health of employees or the balance sheets of their employers.

Undeterred, employers are sweetening their offerings by adding cash incentives and/or disincentives (read: penalties) to encourage workers to actually meet health and fitness goals.

Carrots and sticks

A February 2013 study from Fidelity Investments and the National Business Group on Health, or NBGH, found that nearly 9 out of 10 midsize to large employers (86%) now offer some measure of carrots and sticks in their wellness programs, up from 57% in 2009. The employers who were surveyed expect to spend an average $521 per employee next year to keep their workers on the road to Wellville -- and off their insurance claims list.

The programs and objectives are evolving, says Jerry Noyce, president and CEO of the Health Enhancement Research Organization, or HERO, a nonprofit employee health management research firm based in Edina, Minn.

&quotBack in 2005, 2006, when we were getting big bumps in health care costs, incentives were used as a cost-neutralizer strategy,&quot he says. &quotBut now it's about improving employee performance and productivity as well as recruitment and retention.&quot

How do these &quotshape up or pay up&quot programs work? Do they work for the employee as well as the boss?

Rewards for the reaping

According to HERO, incentive programs -- the &quotcarrots&quot -- come in three basic flavors:

  • Participation-based incentives are the starter program. They reward employees with cash or a health insurance premium reduction simply for participating in, say, an annual health risk assessment or biometric screening.
  • Outcome-based incentives take it a step further and reward employees who achieve and maintain specific health goals for things such as body mass index and cholesterol and blood pressure levels.
  • Progress-based incentives represent a new approach in which employees are rewarded for the progress they make toward specific health goals, whether they reach them or not.

What's the most an employee could save through workplace health incentives? This year, under federal rules, the maximum reward is 20% of the worker's health insurance premium. That means an employee whose coverage costs the 2012 average of $5,615 could save up to $1,123, while those with the average family coverage of $15,745 could save $3,149.

Most employers offer discounts of 3% to 11%, well below the 20% cap, according to Stand Up for Health Care, part of the consumer group Families USA.

J.D. Piro, a health and benefits expert with consulting firm Aon Hewitt, says the stakes will soon increase under Obamacare. The Affordable Care Act encourages wellness programs.

&quotNext year, there will be a maximum (reward) of 30% of the cost of coverage for wellness programs generally and 50% of the cost of coverage for participation in a tobacco cessation program,&quot he says.

Penalties and concerns

Disincentives are typically meted out in the form of payroll reductions, premium surcharges or denial of access to a better health plan. A survey by research firm Towers Watson and the National Business Group on Health found that up to 22% of employers planned to use the &quotstick&quot approach during 2013.

There's no &quotshape up or pay up -- or else.&quot Employers are prevented by law from forcing you to participate, but Piro says doing so is a win-win for everybody. &quotPeople are searching for ways to reduce costs, and certainly maintaining a healthy and productive workforce is one of the ways to reduce costs,&quot he says.

But Dania Palanker, senior counsel for the Washington, D.C.-based National Women's Law Center, says she's worried that incentive programs may adversely affect women, minorities and low-income workers because they have a higher incidence of the targeted health conditions and more socioeconomic obstacles to overcome to meet program goals.

Wellness programs becoming standard

&quotWhile the plan by law has to provide a reasonable (incentive) alternative if there is a health status reason, they don't have to provide one if an employee can't participate in a program because she's working two jobs, has to care for her child, has elder care duties, can't afford a gym or doesn't live where it's safe to walk at night,&quot Palanker says.

But Noyce says health incentives are here to stay.

&quotFor employers, their wellness program does more than just address cost; it's really about improving health to improve (worker) performance,&quot he says. &quotIt's very likely that even if they drop health insurance altogether, they would keep their wellness programs for a much different reason.&quot

Copyright 2013, Bankrate Inc.