Tag Archives: incentives

Shifting ‘Healthcare’ to ‘Well Care’

New York City has been a leader in the future of healthcare. Listing calories on menus, banning soda sales in sizes larger than 16 ounces and now requiring a designation on menus for any items with more than 2,300 mg of sodium (or a teaspoon of salt) are, if you haven’t figured it out, great ideas. While they seem a bit big brother-ish, I applaud the intent.

Today’s healthcare is a losing battle. Incentives are completely misaligned. Providers get paid for dispensing care, and we keep introducing better — and more expensive — solutions that cure health conditions that inevitably develop as we age.

Today’s usage of the word “healthcare” is “care for the sick.” The only way we are going to solve our cost crisis is to change healthcare to mean “well care.”

By aligning incentives to encourage well care, the system will be a lot less frictional. So, how would this work? The HMOs of the 1980s and 1990s had it right. Provider reimbursement rates would be based in part on compliance by their patients. And providers would be free to decline to treat patients who, because of lifestyle choices, would affect their compensation.

Public awareness and support of this new well care normal can be tied to affordability, and I would envision a new class of coverage developing for those who opt in to a well care lifestyle. Accountability would be directly tied to affordability and also to provider choice. Seemingly insurmountable issues call for creative solutions. We need to change course now.

Is Controlling Workers' Comp Costs Really the Answer?

The agendas of all the big workers' compensation seminars agree. Controlling costs is the biggest and most pressing issue. Some might say it's the only issue. But I wonder if this emphasis isn't counterproductive….

The regulatory side

From a regulator's point of view, cost control is accomplished by imposing restrictions, by establishing fee and treatment schedules and, occasionally, by providing incentives that encourage the desired behavior. At bottom, the basis of regulation is distrust.

Controls are generally set to make everyone play by a single set of rules that allow the illusion of predictability and fairness.

I say “the illusion” because a clear understanding of the most common style of regulation shows a dysfunctional relationship. The regulator issues a regulation controlling, say, billing by physical therapists. The physical therapists will always collectively understand their business better than the regulator and will soon find a way to “work around” any portion of the regulations that they find objectionable. The regulator will eventually become aware of the “hole” in the regulations. The regulator will then move to reassert control by tightening the regulations, only to start the cycle all over again. 

In the meantime, the regulator comes to believe that the stakeholders (physical therapists in this example) cannot be trusted. The stakeholders have to be ever more closely controlled. When that fails, it “must be” because those pesky PTs are trying to make excess profits; the belief that they are self-serving becomes entrenched. Multiply this phenomenon by all of the various groups of stakeholders and service providers, and you see the atmosphere of “us against them” that is all too common in regulatory circles.

The trouble with this pattern for controlling costs is that it really is a cost driver. Every time the regulations change, two things happen. 

First, the change itself is costly. Computer programs have to be changed. People have to be retrained. Time that used to be spent doing the work of the industry is spent doing the work of the regulator. At the end of the day, the passive-aggressive resistance of the industry will win, and the cost of cost controls will outweigh the savings.

Second, the services to the injured get constrained by the cost controls, and the ability to provide individualized services suffers. One size does not fit all in injury management, and attempts to make it so usually end up fitting virtually no one.

The claims side

When the claims payer tries to impose control costs, the result is a different kind of cost driver. Once again, the whole system is based upon distrust. The claim must be investigated before it is accepted –even though only about one in 20 of the claims reported for suspected worker fraud justifies a finding of illegal behavior.[i1] Rehabilitative services that the research clearly shows are most effective if provided within the first days of the claim are delayed because this claim just might be the one in 20 (or worse, in a cynical attempt to save money by getting the injured worker with a legitimate claim to “just go away.”) Unfortunately, the delay of necessary services makes the claim more likely to become complex, more likely to attract the ungentle ministrations of the lawyers[ii], and less likely to resolve uneventfully.

Not only does the delay hurt, but the process of investigating the claim creates its own opportunities for adverse outcomes. Investigation is a statement of distrust. Tell the worker that you question whether she is really as hurt as she claims, and the natural reaction is to push back and try to prove that the injury really is severe. Sometimes, in that process, workers become attached to the belief in the seriousness of their injury, with unfortunate results.

Medicalization of the claim often occurs in the process of seeking a diagnosis. The diagnosis is not necessary for treatment of the injury in many cases – conservative care for, say, lower back pain is the same for the first few weeks whether it has a diagnosis or is just unspecified pain. Yet, because of the payer's distrust of the claim, we routinely get a diagnosis even though that risks losing control of the claim. 

Once the claim has been accepted, the scrutiny and distrust continue, again in the name of cost control. Adjusters and third-party payers have to justify their work, so claims are scrutinized. Frustration, delay and anger may be created in another self-perpetuating cycle of distrust.  

The outcomes of this dysfunction are often visited on the injured worker, in the form of reduced or curtailed injury management and lack of time for patient education that has proven value in durable recovery. 

We fail to realize that many cases of failure to recover as anticipated are caused by distrust, expressed in the system as cost-control measures. Moreover, the evidence is overwhelming that claims with unexplained failure to recover make up a large percentage of the 20% of claims that result in 80% of our loss costs. We might save a few dollars on some claims with our cost-control scrutiny, but at the risk of creating unnecessary complex, long-tail claims. We also risk pushing some of the cases into becoming one of those relatively rare cases of genuine misconduct, as people try to make the system work for them, in any way they can.

So, where are the savings?

A way forward

There are many other ways that cost controls actually become inadvertent cost drivers in the system. I'm not going to belabor the point further, because the important take-away is that an alternative exists. If 20% of claims create 80% of costs, then any efforts to prevent claims from falling into that 20% are heavily leveraged in their cost-savings impact.

If we want durable and sustainable cost control, the first step is to understand the dynamics that allow some people to recover and thrive while others with similar injuries spiral down to despair and dependency. While there isn't the space to discuss that topic here[iii], a better understanding about what helps injured people to avoid becoming “disabled” almost certainly leads to real and sustainable cost savings. And the distrust that currently permeates our systems isn't any part of it.

We created our situation, so we ought to be able to control it. Einstein said: “Any intelligent fool can make things bigger, more complex and more violent. It takes a touch of genius – and a lot of courage – to move in the opposite direction.” Our current fixation on cost controls certainly makes the system more complex and full of new players eagerly selling us the latest magic bullet. The understanding to move us in the opposite direction also exists, if we can find the internal fortitude to use it.

[i1] The 5% average comes from presentations at the National Workers' Compensation College, International Association of Industrial Accident Boards and Commissions, 2004-2006, and from the author's own personal observation while supervising the New Mexico Workers' Compensation Administration fraud investigation unit over the course of five years.

[ii] See Aurbach, R.  “Suppose Hippocrates had been a Lawyer,” Psychological Injury and Law, Volume 6, pages 215-237, 2013.

[iii] See Aurbach, R. “Breaking the Web of Needless Disability” Work: A Journal of Prevention, Assessment and Rehabilitation, http://iospress.metapress.com/content/y50n1479vj054364/?p=7d6ab3539cd840bea6e14dbe8f2874dd&pi=0

The Key to Lower Health Care and Absence Costs

Part 2 of Video Interview

(hint: the key to lower health care and absence costs isn't about health)

When medical and disability costs are high, conventional wisdom assumes there must be more illness driving up costs, right? But how much of total cost can we actually attribute to health status versus other factors?

Four components contribute to health and absence costs. It may surprise some readers to learn that health status is not as powerful a predictor of cost as one might expect. Research from nearly two million employees and their families across the US shows that a shockingly small amount of the variation in health care costs can be attributed to health status alone.

This article describes how each of four components independently influences cost when all the others are held constant. The first two components contributing to medical costs and absence involve “non-modifiable” costs that cannot easily be influenced or changed, while the second two parts involve costs we consider to be “modifiable.”

The results come from a sophisticated statistical analysis of health and absence data, along with hundreds of other variables about the companies, workers and jobs (1).

Part I: Basic Needs And Bad Luck
Could health care and disability costs actually go to zero if we had a very young, generally healthy population? Clearly no. To explore the possibility though, we constructed a model that would approximate such a population. We selected characteristics that correlate with lower costs. We took a young (late 20s), mostly male, single (not having children), highly-educated, highly-paid workforce, in a region known for low-cost care, with all benefit policies and business practices aligned for optimal use of benefits.

Can you guess what it would cost to cover the health care spending of this virtually risk-free group? Our data say it is somewhere near $1,300 on average per year. Some costs would be associated with basic needs and some would be the result of misfortune due to genetics or accidents. As you might expect, the majority in this population would have very small expenditures, with a few high outliers. One can debate whether this number is valid because it is virtually impossible to have a population this young, highly-paid, in a specific region, and with a specific gender and marital-status profile. However, it was never intended to be an achievable situation, just the lowest imaginable.

So, the lowest imaginable total for Part I: $1,300 per adult person per year.

Part II: Demographics And Labor Market Face it, age matters and our bodies wear out. Where we live and the type of work we do also matter.

To explain how demographics and labor market affect cost, figure, on average:

  • Older workers spend more on health than younger workers;
  • Women cost more than men (at least up to a certain age);
  • Lower education and lower salary correlate with higher medical and absence costs; and
  • Health care in some regions costs more (North East) than others (Rocky Mountain).

Companies naturally hire a workforce with the skills and characteristics needed for the services and products they produce. One company might attract an older, mostly female, less-educated workforce who will earn minimum wage in Missisippi. Another might attract highly-skilled, younger, male engineers in Boston. Because most companies tend to have a consistent labor market to choose from, and because the demographics of those hired rarely involve drastic changes in type of workers, level of pay, or location, we consider the “Demographics and Labor Market” part of cost to be largely non-modifiable.1

To illustrate the impact of this component, a company in New England with an average employee age of 40 and hourly workers making $40,000 per year would be expected, other components kept equal, to add another $1,700 per employee above the basic ($1,300) amount from Part I. The same group aged 60 years would be expected to have $3,400 per employee due to demographics and labor pool.

Non-Modifiable North East, Hourly Workers, Age 40 Same group, but average age 60
Basics and bad luck, for a young, healthy workforce $1,300 $1,300
Demographics and labor pool $1,700 $3,400
Total Non-Modifiable $3,000 $4,700

Non-Modifiable Total
These two components can vary, as we see, from under $1,300 in our “lowest cost” situation (the young, male 20-somethings), to $4,700 for the aging group. In a typical large company, the non-modifiable total often sits in the $2,500 to $3,500 range. However, full costs for these companies often range from under $4,000 to almost $7,000 per person per year! If basic costs, bad luck, labor pool and demographics only account for about 60%, where does the rest of the cost come from?

Modifiable Parts
By modifiable, we mean something that can be altered by the individual, and/or influenced by the employer. Above, we categorized demographics as non-modifiable because you cannot change them unless you change who you hire or where you locate your company. Modifiable factors are those you can theoretically change in the people you already have.

Part III: Health Status
In general, when health declines, costs go up. Naturally, we put this component in the “modifiable” section of cost, because each of us can decide to what degree we avoid risk and protect our health.

Once again, to isolate the influence of health, the analysis held constant basic needs, bad luck, demographics, and labor pool factors described above. The results indicate that a 10% improvement in health will influence and reduce costs by about the same proportion, between 7-11%.

In other words:

  • A 10% improvement in self-reported health status (a 10% shift to a higher score on a scale of poor to excellent) correlated with combined medical and disability cost decrease of approximately the same amount, 9%.
  • A 10% decrease in the number of diagnoses people have correlated to a medical and disability cost difference of 11%.
  • A 10% decrease in the number of medications people receive resulted in a medical and absence cost difference of 7%.

For those who want a more technical explanation … these analytic models tell us that when health-related metrics indicate a population is 10% healthier, they will be about 10% less costly. If the population is 20% healthier, we would expect them to be 20% less costly.

Let's do the math. If a group has non-modifiable costs (from Part I & II) of around $4,500 per employee, their total costs could be $4,050 — 10% less — if they had 10% better health status than average people of that age, gender, or location, etc.

On one hand, this validates what we all know: if we live healthy lifestyles and avoid many of the preventable illnesses we develop as we age, we will feel better and cost less. On the other hand, if improving health status by 10% would reduce costs by about 10%, what else might a company do to manage costs?

Part IV: Business Practices
The final component of health care and absence costs is often overlooked: business practices. They are both modifiable and significant. What are they? Business practices are the entire set of employee policies and practices captured in everyone's workplace environment and employment contract — such as how compensation works, how health benefits are structured, how time off is allotted, how employees are trained and managed, etc. More often than not, these factors have a stronger influence on cost than health status. However, the magnitude of business practices' influence on employee behavior catches most people off-guard.

The bottom line: business practices can have three times the impact on cost as health status.

If business practices matter so much, why haven't we heard about them before?

Actually, you probably have, just not in combination. Most of these effects are well-documented.

  • Actuaries have decades of evidence showing the impact of deductibles and copayments; however, they are usually seen as differences in cost-sharing arrangements rather than behavioral incentives (2, 3).
  • Management and compensation journals highlight many ways in which financial or other rewards impact worker performance and withdrawal, i.e. absence (4, 5).
  • Risk-management professionals understand that worker satisfaction influences the rate of accident and injury (6).
  • Disability carriers clearly understand the relationship between insurance policy design (i.e., salary reimbursement) and the rate of claim submission (7).
  • Experts in talent development know what sorts of advancement opportunities help an organization keep and motivate its top workers.
  • Health economists have documented the use-it-or-lose it phenomenon of both sick leave and annual deductibles (8, 9).

The evidence is everywhere, but each piece of it typically remains stuck in separate fields. Because this information is so seldom captured and integrated from so many different sources, the impact of independent cost drivers has been nearly impossible to measure, until now.

Economics Tell Us That Incentives Matter
Simply put, if we align business practices such that employees can earn more rewards for being more productive and get extra value by avoiding absences, both are more likely to happen, no matter what the health status of the group. On the contrary, if employees perceive little reward for higher productivity and have to take absence days in order to avoid “losing” them, workers are more likely to be absent, regardless of their overall health status.

Thus, the full array of business practices, including aligned compensation, benefit design, training, and management practices can influence health care and disability costs by as much as 30% or 40% compared to misaligned business practices. Remember, improving health status (Part III) by 10% only produces a 10% cost improvement opportunity.

A typical example is shown in the figure below where medical and absence costs are separated along the lines of the categories discussed above. This is a hypothetical company having typical business practices commonly seen in large corporations. As expected, there is a significant cost component attributed to Basic Costs and Workforce Demographics (Parts I & II). Also notice that there is potential to reduce costs through a 10% health status improvement (Part III). But of critical importance, our models indicate that the vast majority of their modifiable costs, which account for 39% overall, are attributable to their business practices (28%).

While the effect of business practices may seem large, in some cases up to 40%, recall that we are talking about a combination of many different business practices. In the RAND health insurance experiment, the effect of a larger deductible by itself was a 40% difference in medical costs (2). Here the category of business practices includes all policies and incentives governing health care coverage, paid time-off, compensation, disability, training, retirement and other factors. Given the cumulative influence of all these incentives combined, we should not be surprised that their sum is dramatic.

Which business practices matter most? The truth is they act in combination because they are interrelated in fundamental ways. The easy answer is that we need to align them all. But which one is most important for a given organization depends on what they are already doing right. Compensation design influences benefit use, absence policies influence medical costs, training practices influence turnover, and so on. In other words: cost drivers that are sometimes considered to be non-modifiable (in the sense that they are immutable) are really influenced by the modus operandi (management practices) of the business and therefore can be modified.

Indeed there is evidence about specific business, such as:

  • PTO plans and buy-back plans (versus strict sick leave) improve attendance (10).
  • Variable pay plans improve retention (11), absence and benefits use (12).
  • High deductibles combined with fully-funded HSA plans reduce costs and improve health protection (10).

Also, our research confirms that aligned business practices are predictive not only of benefit costs, but also productivity and turnover.

All aspects of human capital management are connected. How you reward, train, and manage people has a stronger effect on health care costs, absence, and productivity than many people think. Business practices are a critical consideration that points to affordable solutions that have a demonstrable effect on business performance. Further, if a company's sole strategy for controlling medical and disability costs is focused on health improvement or value-based purchasing strategies, the largest potential for cost savings will be missed.

Employers invest billions of dollars in health improvement and health management to try to control costs, yet many overlook an even larger opportunity to reduce benefit costs by aligning incentives with their business practices in ways that do not require additional investments. Ignoring such obvious opportunities leaves huge potential for business performance unrealized.

1 This brief discussion focuses only on “demand-side” components of cost; it does not address how the supply-side (meaning differences across providers) affects costs, although this phenomenon is very real. To some degree it is included in regional differences, but it must be acknowledged as a factor not included here.


  1. Lynch W, Gardner H. Who Survives? How Benefit Costs are Killing Your Company. Cheyenne, Wyoming: Health as Human Capital Foundation; 2011.
  2. Newhouse JP. Free for all? Lessons from the RAND Health Insurance Experiment: Harvard University Press; 1996.
  3. Manning WG, Newhouse JP, Duan N, Keeler EB, Leibowitz A, Marquis MS. Health insurance and the demand for medical care: evidence from a randomized experiment. The American economic review. 1987;77(3):251-77. Epub 1987/05/10.
  4. Lazear EP. Performance Pay and Productivity. American Economic Review. 2000;90(5):1346-61.
  5. Trevor CO, Gerhart B, Boudreau JW. Voluntary turnover and job performance: curvilinearity and the moderating influences of salary growth and promotions. J Appl Psychol. 1997;82(1):44-61.
  6. Butler RJ, Johnson WG, Cote P. It pays to be nice: employer-worker relationships and the management of back pain claims. J Occup Environ Med. 2007;49(2):214-25. Epub 2007/02/13.
  7. Lynch WD, Gardner HH. Blog 3.2: Money matters in decisions about disability. Aligning Incentives, Information, and Choice: How to Optimize Health and Human Capital Performance. Cheyenne, Wyoming: Health as Human Capital Foundation; 2008. p. 78-9.
  8. Keeler EB, Rolph JE. The demand for episodes of treatment in the health insurance experiment. Journal of health economics. 1988;7(4):337-67.
  9. Ehrenberg RG, Ehrenberg RA, Rees DI, Ehrenberg EL. School District Leave Policies, Teacher Absenteeism, and Student Achievement. Journal of Human Resources. 1991;26(1):72-105.
  10. Lynch WD, Gardner HH. Blog 8.3: PTO Banks and health savings accounts—small steps toward shared economic incentives. Aligning Incentives, Information, and Choice: How to Optimize Health and Human Capital Performance. Cheyenne, Wyoming: Health as Human Capital Foundation; 2008. p. 212-6.
  11. Lynch W. A study of what makes high performers stay. Entry 10. Health as Human Capital Foundation Blog [Internet]. 2006. Available from: http://www.hcmsgroup.com/2006/05/.
  12. Lynch W. Aligning Incentives: What do bonuses have to do with reducing absence? More than you might think. Entry 2 Health as Human Capital Foundation Blog [Internet]. 2008. Available from: http://www.hcmsgroup.com/2008/01/.

Rethinking The Incentives Built Into The Workers’ Compensation System

A few months ago, my husband began experiencing back pain. First it was nagging, then moderate, and within a couple of days it had reached an intolerable level. I was shocked to see this stoic man with a “mind over matter” approach to his health succumb to such pain. He was completely unable to function.

And so the medical journey began. First came a prescription for opiates, and then came diagnostics (yes, in that order). Next came an epidural injection and then therapy and exercise. At this point, the story sounds much like what we experience in Workers’ Comp on a daily basis. The difference was … this was not Workers’ Comp. My husband is a self-employed realtor. If he doesn’t work, there is no opportunity for pay. There would be no Temporary Disability, no Permanent Disability, no “add on” disabilities, no attorneys. The only motivation was to recover quickly enough to be able to work.

We found the best specialists, in this case opting for a spine clinic that specializes in treating athletes. Diagnostic tests were completed within days, and the epidural was done within a week. No Utilization Review delays. No authorizations. No shopping for discounted diagnostics. No delays … on anyone’s part. It was truly the “sports medicine” approach — excellent up-front treatment, with everyone focused solely on achieving a positive outcome. He cooperated fully with his physician’s advice, doing all the exercises prescribed while at the same time steadfastly refusing to accept any limitations. And his only financial incentive was to be well enough to work. And therein lay my “light bulb” moment.

It would be naïve, of course, to assume that motivations alone can make the difference. Granted, the underlying condition was amenable to quick results. But we all know that much of the time when we see protracted outcomes, it was not the underlying condition that caused the outcome. Many of the outcomes we see are the result of the “system” and those of us who make our living from the system.

Do we do everything in our power to assist the injured worker in his recovery? Do we contribute to the problem unintentionally by incenting the wrong behaviors, or through our application of the very principles meant to protect the injured worker? In particular, do we use Utilization Review as a tool, or as a crutch?

Utilization review allows us to curtail physical therapy at 24 visits. But is that the right thing to do? Likely some circumstances warrant the use of the “cap,” while others do not. While we should use the tool to prevent abuse, shouldn’t we also apply common sense? Research tells us that for people taking opiates, it is critical to keep moving and avoid retiring to the couch. It seems that until we are able to wean the worker off the opiates the therapy is likely actually therapeutic. What about the person who is improving? Should we curtail the therapy before the results are achieved?

It is also fairly common practice to deny gym memberships through Utilization Review. But, for a motivated injured worker, isn’t the gym the most cost-effective way for an injured worker to build strength and restore function? In most cases, a month’s gym dues are less costly than one or two physical therapy treatments.

What about Functional Restoration? Wouldn’t it make sense for us to consider functional restoration in cases that appear amenable? It can be the most effective tool in returning some motivated people to full function and to work!

In addition to the lessons about utilization review, my husband’s injury has heightened my awareness of the issue of cooperation and financial incentives. I believe it’s appropriate to ask ourselves whether the system motivates cooperation or whether it actually motivates “claimant behavior.” Does the person who cooperates fully with the medical rehabilitation plan often end up with a much smaller payday than the person who “works the system?” Is the system fraught with unintended financial consequences?

What if we took a practical approach to Utilization Review, and also offered financial incentives to get well, rather than to sustain ongoing disability? What if we provided incentives to go to therapy, or go to the gym? What about Incentives to cooperate? What about incentives to participate in functional restoration of all different types?

Without turning the system upside down, we can certainly turn our thinking 180 degrees. Perhaps we can find a way to reward injured workers for doing the right thing. And perhaps we can use Utilization Review as a tool, and not as a crutch, to make smarter decisions about the treatments we approve. We can shortcut the unnecessary and costly Utilization Review and give injured workers the best possible chance to recover. Its the right thing to do. And its good business, as well.

Note: In case it occurs to anyone, I did get a HIPPA compliant release from my husband before sharing his story!