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Consumer Financial Incentives: A Decision Guide for Purchasers

Final Contract Report

This report was prepared for the Agency for Healthcare Policy and Research (AHRQ) under Contract No. 290-06-0023-2.

Prepared by R. Adams Dudley, Chien-Wen Tseng, Kevin Bozic, William A. Smith, and Harold S. Luft a


Author Affiliations
Checklist: 21 Questions for Purchasers to Consider
Introduction to Consumer Financial Incentives
Incentives to Select a High Value Health Plan, Provider Network, or Provider
Incentives to Select a High Value Treatment Option
Implementing Consumer Financial Incentive Programs
Acceptance of Consumer Incentive Programs by Consumers and Providers
Special Populations
Evaluating a Consumer Financial Incentive Program
Table 1. Types of Consumer Financial Incentives
Table 2. Frequently Used Criteria for Selecting Performance Measures
Table 3. Essential Elements to Enable Patients' Self-Management of Chronic Diseases
Table 4. Applying Social Marketing Strategies to Developing and Marketing a Consumer Incentive Program
Table 5. Characteristics that Increase the Likelihood that a Consumer Will Respond to Financial Incentives 

Foreword: Exploring the Role of Consumer Financial Incentives

AHRQ commissioned a multidisciplinary group of experts to develop Consumer Financial Incentives: A Guide for Purchasers. It is a tool for employers, health plans, and State Medicaid agencies considering or poised to design and implement a consumer financial incentive strategy. The Guide was created in partnership with a panel of purchasers and consumer representatives. The panel was asked to identify questions that need to be addressed when considering or designing a consumer financial incentive strategy; these questions were used to form an outline for the Guide. Responses summarize empirical evidence, when it exists, and incorporate real life case examples to illustrate a breadth of implementation options.

Interest in consumer financial incentives seems to be increasing, particularly as a strategy to influence the selection of high-value providers. One means of encouraging consumers to consider value when selecting a provider is through the development of tiered networks, which sort providers on some combination of quality and price measures and reward consumers' selection of those of high value (for example, by offering a lower copayment). Although tiering represents a small segment of the market, the use of tiering strategies by employers is growing.b

A recent in-depth scan supported by the Robert Woods Johnson Foundation examined the extent of efforts to engage consumers in health care quality issues (along with six other indicators of market readiness for quality improvement) across 14 U.S. communities. Eleven of the 14 communities were rated as “limited” on consumer engagement, which was the lowest rating. Minneapolis/St. Paul scored the highest, due to its experience in providing comparative plan and clinic-level performance to the public through Web sites and provider directories and its 10-year-old tiered physician network product, which provides quality and cost ratings to consumers.c

This Guide is intended as a tool for exploring if and how consumer financial incentives might be tapped to improve community or market readiness for quality improvement. Incentives can be applied to a range of consumer decisions that purchasers may seek to influence in the pursuit of a high-value agenda:

  • Selecting a high-value provider.
  • Selecting a high-value health plan.
  • Deciding among treatment options.
  • Reducing health risks by seeking preventive care.
  • Reducing health risks by decreasing or eliminating high-risk behavior.

The guide is the latest in a series of coordinated efforts by AHRQ to contribute to ongoing local and national dialogue related to how purchasers—a critical stakeholder group—can work to improve quality of care. A listing of AHRQ resources specific to consumer financial incentives is available at In particular, we recommend Pay for Performance: A Decision Guide for Purchasers,d which launched AHRQ's series of user-driven decision guides.

Just as consumer incentive strategies are in their infancy, so too is the related research agenda. Purchaser, consumer and researcher participants in a November 2006 colloquium convened by the Agency for Healthcare Research and Quality and the Commonwealth Fund e were charged with developing a research agenda on incentives; they identified a set of priority research questions, including:

  • What is the impact of tiered networks on provider quality and cost?
  • How can consumer financial incentives be used—alone or in tandem with provider incentives—to improve quality of care?
  • How does consumer response vary by the size of financial incentive?
  • Are financial incentives worthwhile, given the cost of paying for the incentives themselves and then marketing them?

As government purchasers, employers, health plans, and other buyers of health services consider or reconsider their quality agendas, they are encouraged to explore and debate sponsorship of consumer financial incentives within the context of an overarching local or national quality framework alongside pay for performance and more traditional quality improvement strategies. We hope this Guide informs purchaser deliberations, and we welcome feedback.

Carolyn Clancy, Director, AHRQ
Peggy McNamara, Senior Fellow, AHRQ.


Leading employer groups, employer coalitions, State Medicaid agencies, and health plans are exploring the potential power of consumer financial incentives in influencing quality goals and are looking for the evidence base and illustrative examples to guide their decisionmaking processes. The Guide is an evidence summary organized around a series of 21 questions that span incentive design and implementation decisions as identified by user-stakeholders. That is, the users, in this case purchasers and consumers, wrote the outline for the publication and reviewed a formative draft. The Guide reviews the application of incentives to five types of consumer decisions:

  1. Selecting a high value provider.
  2. Selecting a high value health plan.
  3. Deciding among treatment options.
  4. Reducing health risks by seeking preventive care.
  5. Reducing health risks by decreasing or eliminating high risk behavior.

The publication of the Guide is timely for several reasons. First, employers are interested in consumer engagement strategies, including financial incentives, especially in light of the growing consumer-driven health plan movement. Second, and more recently, the President's Executive Order (August 2007) highlighted provider and consumer incentives as tools for transparency and a higher quality, more efficient health care system. And finally, State Medicaid programs, in response to grant incentives embedded in the 2005 Deficit Reduction Act (i.e., Medicaid Transformation Grants and Health Opportunity Accounts) are increasingly exploring the potential of consumer financial incentives.


The authors gratefully acknowledge the valuable comments made by 14 public and private purchasers, consumers, and academic professionals who generously contributed their time and expertise in reviewing a formative draft of this Guide.

 Author Affiliations

This report was prepared by R. Adams Dudley, MD, MBA (University of California, San Francisco); Chien-Wen Tseng, MD, MPH (University of Hawaii, Pacific Health Research Institute); Kevin Bozic, MD, MBA (University of California, San Francisco); William A. Smith, EdD (Academy for Educational Development); and Harold S. Luft, PhD (University of California, San Francisco).

The views expressed in this report are those of the authors. No official endorsement by the Agency for Healthcare Research and Quality or the U.S. Department of Health and Human Services is intended or should be inferred.

a Go to Author Affiliations above.
b Baker L, Bundorf K, Royalty A, et al. Consumer-Oriented Strategies for Improving Health Benefit Design: An Overview. Technical Review 15 (Prepared by the Stanford University-UCSF Evidence-based Practice Center, Stanford CA, under Contract No. 290-02-0017). AHRQ Publication No. 07-0067. Rockville, MD: Agency for Healthcare Research and Quality; July 2007. Available at Accessed on October 11. 2007.
c Powers PE, Painter MW. A Checkup on Health Care Markets. Princeton, NJ: Robert Wood Johnson Foundation; April 2007.
d Rosenthal MB. Pay for Performance: A Decision Guide for Purchasers. Rockville, MD: Agency for Healthcare Research and Quality; April 2006. AHRQ Publication No. 06-0047. 
e Toward a Research Agenda on Quality-Payment Alignment: Findings from an Invitational Colloquium. Rockville, MD: Agency for Healthcare Research and Quality; May 2007. AHRQ Publication No. 07-0055-EF. 

Page last reviewed November 2007
Internet Citation: Consumer Financial Incentives: A Decision Guide for Purchasers: Final Contract Report. November 2007. Agency for Healthcare Research and Quality, Rockville, MD.