Many employee decisions regarding benefits and well-being are affected by behavioral economics. Understanding the biases and heuristics that exist can help employers effectively communicate the benefits and program value to employees. Employers want their employees to optimize these decisions, which will help all involved.

Two important, overarching behavioral economics premises are framing and mental accounting.

Framing involves how consumer choices are influenced by the way information is presented. Some healthcare related examples of framing are:

• Completing a health risk assessment by offering a $100 reward vs imposing a $100 penalty. People generally react more favorably to the penalty.
• Patients who are told a procedure has a 5% mortality rate (loss-framed) are more likely to avoid the procedure than patients who are told the procedure has a 95% survival rate (gain-framed). The information presented is basically the same but is framed differently.
• Regarding selecting a health plan, a positive framing message is “We are providing a high-deductible health plan plus a health savings account.” A loss framing message is “Don’t miss out on $500 in seed money for your health savings account that is paired with a high deductible health plan.”

Mental accounting is a concept associated with the work of Richard Thaler (for more information see Part 1 of my blog). According to the theory of mental accounting, people treat money differently depending on the money’s origin and intended use, rather than thinking of it in terms of the “bottom line,” as in formal accounting. In other words, we think of our money in mental silos.

• We treat that $20 we find in a jacket pocket differently than we do other money.
• A big hurdle is getting employees to sign up for the company 401k plan, but once they are signed up, it is highly unlikely they will opt out as that money is mentally earmarked for retirement savings. This is why auto enroll is so effective.

Incentives

The most effective incentives are short-term goals that are well communicated. Throw in a couple of other techniques like herd mentality and loss aversion framing, and you should be highly successful. Since long-term goals aren’t effective short-term prizes are an effective incentive to support long-term goals. For example, tangible rewards like a gift card that is in hand, but it activated when an action has been completed.

The most effective incentives are short-term goals that are well communicated.

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Which Works Better, Positive or Negative Incentives?

Premium penalties are more effective than premium credits. An American Health Policy Institute article “High Cost Claimants: Private vs. Public Sector Approaches”, discusses how Honeywell adjusted their incentives based on this theory. Honeywell initially incentivized employees to participate in health screenings by linking participation to Health Savings Account contributions. Participation increased when the company began penalizing employees $1,500 for non-participation.

The company also found success with a “Surgical Decision Initiative.” This initiative provides care management for employees seeking back, hip, and knee surgeries—all of which have high variability in costs and high variability in potential treatments. Initially, the company offered an incentive of $500 for participation, but did not see enough employee engagement to provide ROI. Since introducing a $1,000 penalty; however, 90 percent of employees seeking these surgeries participate in the initiative.

Short-Term vs Long-Term Goals

In the case of weight loss, the long-term goal of losing 24 pounds in a year is a lot less effective than setting the goal of losing two pounds per month.

Figure 1 is a nice visual of how people work hard to obtain that short-term goal.

The small spikes are people making their goals, with not a minute to spare. A finishing time of 3:59 is 1.4 times as likely as one of 4:01.

Innovative Approaches: Lotteries and Prizes

Banks around the world have set up lotteries tied to deposit accounts to encourage individuals to save. The banks have seen an increase in deposits. The same approach can be used for employers for contributing to savings plans. Only employees who contribute to their savings plan during a time period would be entered into the lottery. Employees who do not participate would be missing out, tapping into regret aversion. Tapping even further, all employees could be entered into the lottery but only employees who contribute could win.

The University of Pennsylvania’s Center for Health Incentives and Behavioral Economics (CHIBE) is performing a trial to improve medication adherence and health outcomes for patients recovering from acute myocardial infarctions. Studies show that medication adherence in the year following heart attacks is often poor, despite the benefits of the medication. Even making medication free may not be enough to drive adherence.

Taking their medication makes people eligible for to win cash prizes every day. The following day they are contacted letting them know whether they won (short-term rewards), or would have won if they had taken their medication (regret aversion). Family members or friends receive messages if patients miss more than two doses of medicine (social pressure).

Behavioral economics combined with data analytics provide employers with information to help employees make optimal benefit decisions as well as monitor and assess those decisions.

Behavioral economics combined with data analytics provide employers with information to help employees make optimal benefit decisions.

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