Economic Benefits of Aligning Employee Health Insurance Contributions to Controllable Lifestyle Behaviors

Lifestyle behaviors such as smoking, unhealthy diet, and physical inactivity have been identified as the leading causes of chronic diseases, including heart disease, stroke, diabetes, obesity, metabolic syndrome, chronic obstructive pulmonary disease, and some types of cancer. In 2016, US healthcare spending attributable to modifiable risk factors was $730.4 billion, corresponding to 27% of total healthcare spending.

Responsibility for healthcare costs is shared between employer and employee

Since the inflation caps legislated on wages at the time of World War II, health insurance benefits have been the number one employee perk in the US – almost universal and generous in amount. While employers have largely remained committed to preserving health coverage as a benefit of employment, over time part of the responsibility for the cost of healthcare has shifted from employer to employees.

The primary shift took the form of cost sharing as 90% of workers with single coverage have a general annual deductible that must be met before most services are paid for by the plan.2 The average deductible amount in 2023 for workers with single coverage and a general annual deductible is $1,735. This has increased 10% over the last five years and 53% over the last 10 years.

Regardless of their plan deductible, most covered workers also pay a portion of the cost for a physician office visit. Many covered workers face a copayment (a fixed dollar amount) when they visit a doctor, but some workers have coinsurance requirements (a percentage of the covered amount) instead.

Over the last two decades there has been a noticeable and sustained increase in cost sharing with employees picking up an increased share of healthcare costs at point of service.

Most covered workers contribute to the cost of the premium for their coverage. On average, covered workers contribute 17% of the premium for single coverage and 29% of the premium for family coverage. The sharing of premium contributions between employer and employees has been largely stable over the last decade.

Health insurers and employer funders of healthcare have generally felt comfortable with the gradual cost shift of medical expenses to employees. Expenses that fall within a deductible, or expenses associated with an out of network visit or off-formulary medication, are seen as largely controllable and somewhat foreseeable, and therefore the employer has regarded the cost shift as a justifiable way to contain healthcare costs. In addition to the employer benefiting from passing on a share of cost to the employee, there is a further benefit in that the employee is incentivized to reduce medical consumption and this has a favorable effect on overall premium rates.

The extent of cost shifting though has likely reached a state of saturation as is evidenced by the leveling off of individual borne costs in recent years compared with their large growth before. It becomes harder to justify the cost shift when the nature of medical expenses become less controllable and less foreseeable.

A new horizon is opening, however, for employers to address high healthcare costs by making employees stronger partners in their health contributions.

Inequity in the way employees contribute to their health insurance

Employees typically share in health insurance premiums either by way of a percentage of the premium or a fixed dollar amount. The amounts contributed vary between employees based on only a limited number of factors. These would usually be type of coverage/plan benefits selected and number of dependents that the employee elects to be covered. These are in the employee’s direct control, and it therefore completely justified to charge a higher or lower contribution share if the employee elects a higher or lower set of benefits or more or fewer dependents.

Employee contributions do not vary by age, gender or state of health even though these have substantial risk cost implications. Since they are not regarded as controllable, they are not used to calculate the employee share of contribution. (They do of course have strong bearing on the total contribution rate).

Over the last few years, supporting evidence for a new risk factor has emerged that is both controllable and has a strong causative effect on risk, namely lifestyle behavior. If two employees choose different levels of benefit coverage their employee premium shares will be different because they are making choices that impact their overall health insurance costs. Yet when two employees exhibit different lifestyle behaviors, they are charged the same employee share of premium even though they are similarly making choices that impact their overall health insurance costs. This is clearly inequitable.

The case for differentiating employee contributions by lifestyle behaviors is particularly strong, considering that the evidence now shows, at a granular level, that small changes to a few key behaviors such as physical activity, have a causal impact on risk, and this is true across the risk spectrum. Furthermore, advances in data and technology (wearables), now allow for individualized pathways and measurement.

Benefits of aligning employee contributions to their health lifestyle behaviors

Because lifestyle behaviors are both a choice the employee makes, as well as a clear determinant of total health insurance rates, it follows that the employee’s share of contribution should adjust either upwards or downwards based on their lifestyle behaviors. The benefits of aligning the employee’s share of contribution with their lifestyle choices are:

• Employees that are exercising healthy behaviors are encouraged to continue doing so, thereby continuing to ease the pressure on overall healthcare costs from this group.
• Employees that are not exercising healthy behaviors become incentivized to change behavior due to their ability to decrease their insurance contributions (or avoid contribution increases). By adopting healthier lifestyles, they contribute towards creating a healthier risk pool for the employer.
• Employees that are not exercising healthy behaviors and still choose not to do so, bear a larger share of the health insurance contribution, thereby reducing the subsidy that the employer provides towards these employees.

The difference in employee premium between those with better lifestyle behaviors and those with worse lifestyle behaviors should not exceed the difference in healthcare related costs associated with controllable lifestyle behaviors.

Conditions needed to implement behavior aligned contributions

In order to implement differential employee contributions based on lifestyle behaviors, the following need to be in place:

• The lifestyle behaviors need to be measurable and verifiable. Employees need to be given clear visibility of what will be measured and exactly how these measures will be used to calculate
• While self-reported behaviors may still allow the employer to implement lifestyle based premiums, they are far from ideal and risk undermining many of the benefits that the employer is expected to achieve from having a verified framework in place.
• The employer should provide employees with tools and education on how to improve lifestyle behaviors. Employee wellness programs and related initiatives provide a mechanism for doing so. These need to be given support and visibility from within the company. Ideally these programs should include incentives to encourage maximal participation. The activities and outcomes promoted by the employer’s wellness program should align with the criteria used by the employer to differentiate employee contributions.
• In order to comply with the provisions of the Affordable Care Act, the difference in premium charged to the most lifestyle compliant employee and the least lifestyle compliant employee must not exceed 30% of total premium. This is a perfectly acceptable constraint as it is consistent with the principle stated above that the difference in premiums should not exceed the difference in lifestyle related risk costs, and these are less than 30% of premium.
• All activities and biometric outcomes should have reasonable alternative standards in place for people for whom it would be unrealistic to achieve these goals (e.g., due to medical reasons or disability). Reasonable alternative standards must offer a different way in which such an employee can achieve the same differential in insurance contribution.
• In order to maximize equity, each employee should be provided a personalized pathway to achieving improvement in lifestyle behaviors and biometric markers. Activity goals and how to achieve them should consider demographic and risk factors and guide each employee in a way most resonant to that employee on how to improve lifestyle choices and sustain healthy behaviors.
• It goes without saying that all health related data needs to adhere at a minimum to HIPAA data privacy standards. Further care needs to be taken to ensure that one is not able to infer health related info from the level of premium carried by the employee.3

Economic effects

The economic effects of differentiating employee insurance contributions by lifestyle behaviors will depend on how differentiated the employer chooses to make the premium (the maximum as noted is 30% differential) and how the employer chooses to balance the upside and downside to the employee. For illustrative purposes we show here a scenario where the employer chooses the following differentials:

Average industry contributions are used for calculation purposes as follows:

The model starts with an assumed distribution of employees across the four lifestyle behavior classification levels. Each classification level carries a lifestyle relative risk ratio, calculated off several million life years of lifestyle and health claims data. Different engagement patterns are assumed. The employer’s net share of contribution changes depending on the mix of engagement. Furthermore, overall healthcare costs change based on levels of engagement and the employer’s share of improvement in these is calculated.

The economic benefits to the employer are fairly stable irrespective of levels of engagement. In the case of no-one changing their behaviors the benefit is derived wholly from the “poor behavior” employees carrying a higher share of contribution. In the more desirable and more likely case of there being a shift in lifestyle behaviors, the benefit to the employer emerges from improvement in healthcare claims.

Aligned behaviors results in more equitable sharing

When employee health insurance contributions are aligned with lifestyle behaviors, a more equitablelan sharing of contributions is created. Employees become incentivized to engage in behaviors that have a causative reduction in healthcare costs. The employer enjoys economic advantages under almost all scenarios of engagement.

Alan Pollard is president-product and innovation of Vitality Group. Tanya Little is chief commercial officer of the company.