Wednesday, November 5, 2014

Deeper Lessons from Recent Employee Wellness Program Controversies

It’s no secret that employee wellness is an important issue today. As just one example, Honeywell’s wellness program penalizes employees if they don’t complete a biometric screening. According to newspaper reports, the penalties can include a $500 medical plan surcharge, the loss of up to $1,500 in contributions to health savings accounts, and up to $2,000 in tobacco-related surcharges. This has landed Honeywell in hot water because two employees complained to the U.S. Equal Employment Opportunity Commission (EEOC), and the EEOC subsequently filed a lawsuit against Honeywell saying that these noncompliance penalties violate federal law. I’ll let others comment on the legal merits of this case, but I think there are at least three lessons here that go beyond Honeywell and the specifics of this dispute.

First, the emphasis on penalties rather than rewards in some employee wellness programs underscores the need for those who design corporate policies of any type to have a sound understanding of what drives human behavior. If one believes that employees are exceedingly rational (as is common in neoclassical economics), then it shouldn’t matter whether something is implemented as a penalty or a reward. For example, a $500 reward for complying is viewed by a dispassionate ultra-rational person as the same as a $500 penalty for non-compliance.

But research in psychology and behavioral economics demonstrates that real decision making isn’t dispassionately rational; rather, it’s shaped by a number of cognitive biases and limitations. Of particular relevance here is the phenomenon of loss aversion—that is, individuals are significantly more bothered by a loss than a gain. So it probably matters--maybe a lot--whether wellness plans (and many other policies) emphasize penalties or emphasize rewards. Admittedly this is complex. On the one hand, this might imply that companies should design policies around penalties because employees will work harder to avoid them than to achieve rewards. But what seems to have happened here and elsewhere (e.g., Penn State) is that the threat of a penalty seems more coercive than the possibility of a reward, so employees have a stronger negative reaction from the outset when the program uses a penalty-based approach. Maybe these are exceptional examples, but the fundamental point remains—corporate policy-makers need to have a deep understanding of human behavior in order to design effective policies.

Second, the Honeywell lawsuit can be a tale that illustrates the importance of employee voice. The opposition to the Honeywell wellness plan, at least by some workers, harkens back to a year ago when Penn State similarly launched a wellness plan that included a monetary penalty for employees who failed to complete a health questionnaire (a very invasive questionnaire, by the way, that included asking women if they intended to become pregnant, but that’s a story for another day). Unlike many U.S. corporations, U.S. universities have strong traditions of employee voice by key employees (in the form of faculty governance). There was an uproar on the Penn State campus in reaction to this plan, there was a special meeting of the faculty senate in which administrators were told of passionate employee objections, and the penalty part of the wellness program was withdrawn. Maybe it’s just coincidence, but I find it telling that Honeywell is facing a lawsuit because when workers lack a voice, they need to turn to other avenues for redress. Wouldn’t it be better for all involved to resolve many issues through employee voice rather than through the courts?

Third, on some level, it’s natural to have sympathy for Honeywell and other employers. Health care costs are obviously a major challenge, and something needs to be done. But I think the deeper lesson is that this is another symptom of a fundamentally broken system. The U.S. is fairly unique in having a health care system that is so closely tied to voluntary, employer-provided insurance. At its worst, this system can dampen overall employment, contribute to job lock (employees not leaving jobs because of the difficulty in switching health carriers), and burden American employers with anti-competitive costs. And this system isn’t necessarily good for health care delivery, either, because the private health insurance system can increase costs by dividing up risk pools and increasing administrative costs.

We need to remember, however, that corporate American was instrumental in shaping this system in the first place (see Jennifer Klein’s book, For All These Rights: Business, Labor, and the Shaping of America’s Public-Private Welfare State). From the 1940s on, business lobbied against national or universal health insurance so that employees would need to rely on employer-provided benefits, and therefore be loyal solely to their employers, not to the government or even worse, to a labor union! So we probably shouldn’t feel too sorry for Honeywell and other corporations as they grapple with health care challenges in the system that they largely created. More importantly, rather than rearranging the deck chairs on the Titanic by fussing with incentives (and even worse, penalties) through employee wellness programs, fundamental reform that decouples health care coverage from employment should be the real issue of the day.

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