On healthcare reform, carrots work better than sticks

The U.S. Congress is an assembly of scolds when it comes to raising money for healthcare reform, wanting, for example, to hike the health insurance premiums of people behaving badly — such those who smoke, don’t exercise regularly, or eat too much — and tax those who spend what the Congress considers to be “too much” for health insurance or who consume bad foods like sugary drinks.

As for the savings the Congress asserts it will achieve, many fear that these, too, will prove punitive. The elderly and their medical care providers, for instance, worry that the “savings” that Congress will squeeze out of Medicare to fund healthcare reform will come right out of their hides. Small wonder that, although the American people want health reform, Congress has an approval rating ignominiously similar to that of HMOs.

Somehow, Congress missed a key insight of behavioral economics: People hate losing money. Psychologically, a loss has much more traction than a gain of an equal amount.

But it is not too late. The money needed for healthcare reform can be obtained through carrots, not sticks.

• Want people to shape up, get healthy, and comply with self-care regimens for chronic diseases, thus lowering healthcare costs?  Instead of punishing them with higher insurance premiums, reward them with cash for good behavior.

A South African program that paid relatively modest sums for quitting cigarettes, working out, and losing weight achieved remarkable results. It was not for everyone, but the costs of diseases like diabetes fell by 21 percent among those who participated. These rewards would work especially well if they were structured with long-term contracts to underscore the importance of long-term lifestyle changes rather than quick but fleeting results.

Federal laws that limit rewards for wellness along with employers’ reluctance to contract for the long term with insurers currently prevent the adoption of these kinds of incentives. Employers worry that after they have invested in converting a couch potato into a hard body in the first three years of the contract, he will go to work elsewhere. But the health reform exchange President Barack Obama has proposed could easily feature long-term contracts, because they will be purchased by individuals, not corporations, and minor changes in legislation could enable plentiful rewards for healthy habits.

• Want to stop people from over-insuring with “Cadillac” health insurance plans? Currently, employees who receive employer-sponsored health insurance pay no income taxes on it. This tax exemption causes them to use health insurance as if they were spending other people’s money. They do not recognize that they actually pay for health insurance with foregone income. To correct this problem and tap $246 billion of potential tax revenues, the Congress has proposed taxing Cadillac programs.

Instead, Congress could help people by extending the present tax exclusion to all insured employees and, eventually, to all individual purchasers of health insurance.

For example, an employer who spends $17,000 for an employee’s family health insurance could also offer her $17,000 in wages — if she purchased at least a catastrophic health insurance plan appropriate for her income. The amount spent on health insurance would remain tax-free. Any leftover funds (say $5,000 after the purchase of a $12,000 comprehensive family policy), would be taxable. Employees could maintain employer-sponsored plans, but many would likely prefer higher wages to high-cost health insurance. They would likely spend less than their employers for health insurance, thus yielding newly taxable income.

In Switzerland, where consumers are the sole purchasers of health insurance, costs are 40 percent lower than ours. And despite its lower costs, Switzerland achieves universal coverage, excellent healthcare, and the greatest equality in health across income classes. If U.S. healthcare spending declined to Switzerland’s level, this carrot could yield up to $400 billion in new tax revenues.

• Want doctors to do the right thing in treating their patients? Instead of cutting their pay, show them a little love, too, by changing their reimbursement. Because all doctors and hospitals receive separate payment for separate activities, a program that integrates healthcare across diverse providers and improves the patient’s health may thus lose money.

For example, in true no-good-deed-left-unpunished fashion, a group that improved the health status of its congestive heart failure patients through integrated care lost all the savings it created — nearly 40 percent of costs in one year — because hospital admissions fell as a result. Had this group been paid a flat fee for providing all the services their patients needed, they would likely have made some money in return for their efforts.

As these examples show, a carrot can be a lot more effective than a stick.

Herzlinger (reginaherzlinger.org) is the McPherson Professor of Business Administration at Harvard Business School and author of Who Killed Health Care? (McGraw Hill). She serves on the board of directors of some healthcare companies.