HPU
Incentives matter!
Author: Jasson UrbachDate: 8 June 2010

A task of economics is to explain the forces that affect human decision-making and a key element of economic theory is that incentives matter.

When incentives change, peoples’ behaviour also changes. For example: your boss proposes that if you sell fifty widgets this month, you will receive an extra R2,000. This incentive will make you weigh up whether the anticipated benefits would exceed the cost of achieving such a target. If you decide it is well worth the extra effort, you will strive to achieve it. But, if you think that the extra effort required to sell fifty widgets is far greater than the R2,000, you will not feel driven to put in the effort needed.   

According to the World Bank, the increasing burden of ill health across the globe is primarily driven by the increase in chronic conditions. More specifically, the Oxford Health Alliance’s 3-4-50 model suggests that three behaviours (smoking, no exercise and poor diet) are primarily responsible for four diseases (Cancers, Diabetes, Lung Disease and Heart Disease) and result in 50 per cent of deaths worldwide.

Most chronic diseases and conditions are preventable and controllable if individuals follow a balanced diet and exercise regularly, giving credence to that old adage, “prevention is better than cure”. So why is wellness elusive? The problem of under-consumption of preventative care is one of behavioural economics – the future rewards of a healthy lifestyle are significantly undervalued relative to the present day cost. Also, people tend to lack information on the true efficacy of different health and wellness approaches and to overestimate their abilities and health status.

Since economics tells us that people respond to incentives, health insurance organisations and companies, which are driven by the profit motive, are persuading individuals who are negligent about taking preventative measures to participate in what are commonly referred to as wellness programmes by offering them attractive incentives.

Essentially wellness programmes seek to encourage healthy behaviour that reduces long-term healthcare costs by rewarding members for improving their health. Arguably the biggest and most successful wellness programme in the world is South Africa’s very own Vitality programme, operated by Discovery since 1998, which has over 1.6 million members. Membership in Vitality is voluntary and offered separately from the health plan.

According to one of the world’s leading financial firms UBS, “Vitality encourages wellness. We believe that through its wellness programme, Vitality, Discovery is able to improve the risk claims experience by encouraging healthy living and preventative screening. We believe that this impacts both the incidence and severity of claims”.

In other words, Vitality provides a win-win situation for both the industry and members. Individuals enrolled in the programme get healthier and reduce their medical expenses, improving the cost ratios of those medical schemes under Discovery’s management.

The evidence that increased physical activity, a balanced diet and not smoking contribute to better health is clear. But far less comprehensive is data on the cost and benefits of these lifestyle changes. The three ground-breaking Vitality Insured Persons (VIP) studies, with the involvement of researchers from the UCT Sports Science Institute of South Africa and Harvard University, were conducted to establish the effectiveness of Discovery’s Vitality wellness programme in addressing the rise in healthcare costs. 

These studies reveal that highly-engaged Vitality members who attend gym regularly, eat healthily and undertake regular preventative screening tests, experience lower hospital costs, shorter hospital stays and fewer hospital admissions than those with a low level of engagement in the programme. The studies conclude, “The highly active members who were hospitalised in 2006 experienced a mean annual savings in associated medical claims of R5,025  compared with inactive members”. Furthermore, hospitalisation costs per member decreased in each group from the inactive (those with fewer than three gym visits per annum) to the high active group (those with more than forty eight gym visits per annum). More specifically, the researchers state, “Participants in the high active group saved an average of R1,535 in health care costs compared with the inactive group”.

The Discovery Vitality programme is not only benefiting its members by improving their health, well-being and bank balances. It is also creating a society-wide health ethos by sponsoring programmes that attract and encourage individuals from all sectors of society to follow healthier lifestyles by training for and participating in various sports events. Innovative wellness programmes, such as Vitality, that are driven, not by altruism, but by the profit motive, are an important method of tackling the increasing burden of chronic disease across the globe.

Author: Jasson Urbach is a director of the Health Policy Unit (a division of the Free Market Foundation). This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.
 
HPU Feature Article / 08 June 2010