Employers Using Incentives to Trim Health Costs

Paying employees to take better care of themselves can reduce health costs. But avoid problems by understanding tricky laws.

By Martha Lynn Craver, Associate Editor, The Kiplinger Letter

March 7, 2006

Desperate to contain health care costs, more and more employers are ratcheting up the pressure on workers and their dependents who smoke.

Increasingly, both public and private employers are adding surcharges to the health care premiums that workers pay for coverage if they admit to using tobacco. The surcharges range from about $20 to $50 a month. Employers instituting the fees include the publisher Gannett Co., PepsiCo and the states of Georgia and Alabama.

Smoker surcharges are part of a larger trend among employers to include incentives, penalties or both in their employee health insurance coverage to encourage healthier behavior among their workers. This cash-for-wellness strategy is emerging as a key weapon in the battle to contain health care costs, which have soared into the double digits in the past few years.

More and more employers are offering rewards to workers who participate in weight-loss or exercise programs, or who agree to enroll in programs that help them manage diseases such as asthma and diabetes. Rewards are usually straight cash payments or discounts on their health insurance premiums.

"Employers used to shift higher health care costs to employees in a blanket fashion, but they realized that was a Band-Aid approach. Now they are focusing on making their populations healthier so as to decrease costs over the long run," says Camille Haltom of Hewitt Associates, a human resources consulting firm.

According to a survey conducted by Hewitt, 41% of employers use some form of reward or penalty in their health care plans—and half could be doing so within a year or so.

Generally, behaviors that are considered "lifestyle" choices, such as smoking, tend to have surcharges attached to them. Conditions that may also have genetic links and be far more difficult to combat, such as obesity, are more likely to involve a rewards-based system, says Tom Billet of Watson Wyatt Worldwide, a benefit consulting firm.

In any case, employers considering any reward and/or penalty systems need to ensure that they do not run afoul of the Health Insurance Portability and Accountability Act (HIPAA). That means tying such systems to participation in programs—not just to actual behavior. Smokers, for instance, would not have to pay a higher premium if they entered a free stop-smoking program. Haltom also warns employers that HIPAA limits the total of rewards or surcharges to no more than a fifth of premium costs.

Furthermore, in designing their programs, employers must be careful not to discriminate against any worker who, because of circumstances beyond his or her control, cannot make hoped-for improvements. That's why, for instance, incentives would be offered to employees not for improving their cholesterol levels, but simply for taking part in a cholesterol-lowering program. In other words, the reward must be for participation, not results. And programs should be properly vetted. "This is a gray area, so employers should have their corporate counsel review the programs before going forward," says Haltom.

But with clear rules to follow, many more companies are sending the message that they want smokers to pony up more insurance cash or quit. Some are even applying the extra charge if a spouse or other covered dependents smoke—even if the employee doesn't

Beginning this year, Gannett added a $50 a month surcharge to the health premiums of its employees who smoke. Like most employers, Gannett relies on the honor system to identify smokers. "It's impossible to police who's smoking and who's not, but employees are jeopardizing their employment if we discover they're not being honest," says Tara Connell, a spokeswoman for Gannett. PepsiCo charges smokers $100 a year more for their health care coverage. "Our philosophy is to share medical costs with employees, and since smoking leads to higher medical costs, it follows that we would have workers help pay for those higher costs," says PepsiCo's Elaine Palmer.

State governments are also getting into the act. Georgia charges state employees who smoke $40 a month more for coverage. If they are caught lying, they can lose their coverage for a year. Alabama charges $20 more per month, and workers are asked to sign a declaration that they do not use tobacco and that they agree to be tested. If they fail to sign the document, they are charged the $20 a month. Alabama's program covers all types of tobacco use, not just smoking.

The National Workrights Institute calls the surcharges "lifestyle discrimination," and says that this approach amounts to a violation of workers' privacy. "Employers are using the power of the paycheck to tell their employees what they can and cannot do in the privacy of their own homes," says an institute paper on the subject.

Some employers, such as Weyco Inc., a Michigan-based medical benefits administrator, are going so far as to fire workers who refuse to stop smoking. Most benefit experts say that this approach is and will remain rare. "Employers competing for talent will be content just to charge the smokers more," says Hewitt's Haltom.

The Centers for Disease Control and Prevention says that smoking is the leading preventable cause of death in the U.S. About 440,000 deaths each year are attributable to smoking. The agency estimates that the annual cost of smoking is more than $75 billion in direct medical costs and about $80 billion in lost productivity.