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Counterpoint: Incentives for Wellness
July 3, 2014 10:00 AM
by John Cawley, Cornell University
Last week, we presented both sides of a discussion of the Affordable Care Act, where premiums can be adjusted to create incentives for individuals to engage in healthier behaviors including weight loss. This week, we present Professor John Cawley's counterpoint to Morgan Downey's paper, The Doctor Is in Charge: How the ACA Puts the Employee's Physician in Charge of the Wellness Program. Next week will feature Downey's rebuttal to Cawley's initial paper.
Morgan Downey raises several interesting issues in his essay. We agree on several points, for example, that current regulations are “really quite porous,” with the result that enrollees will be able to get the rewards even if they do not alter their health behaviors. There are also several areas of disagreement that merit further discussion, and I focus on those in this essay. To provide context, my position is that financial incentives for healthy behavior can improve social welfare by internalizing the external costs of risky behaviors and help people with time-inconsistent preferences to adhere to a healthier lifestyle. To achieve the goal of increasing social welfare, the penalties for risky health behaviors should be set equal to the external costs. The design of the rewards (in terms of their frequency, salience, and the amount of loss aversion they invoke) may be critical in determining their effectiveness.
Downey raises an important question: If obese individuals have not responded to the existing costs of obesity (such as worse health, stigma, discrimination, and lower wages), then why would they respond to a financial incentive in a wellness program? First, people probably do respond to the existing costs; if there were zero health, social, or financial consequences of obesity, there would presumably be more obesity. Second, wellness incentives can be specifically designed to make them more influential than the health and social consequences. As stated in my initial essay, a key tenet of economics is that people respond to incentives, but an important caveat is that people do not respond equally to every incentive. Behavioral economics uses the tools of psychology to better understand economic decisionmaking, and its insights can be used to increase the effectiveness of incentives. For example, all else equal, people respond more to incentives that are salient and immediate.
Read Professor Cawley's full counterpoint at WileyOnline.