Checklist: 21 Questions for Purchasers to Consider

Consumer Financial Incentives: A Decision Guide for Purchasers

Introduction to Consumer Financial Incentives

Question 1. What are consumer financial incentives?

Question 2. What consumer decisions can be influenced by financial incentives?

Question 3. Do consumer financial incentives work?

Incentives to Select a High Value Health Plan, Provider Network, or Provider

Question 4. What is a "tiered" health plan?

Question 5. How do tiering and other benefit design options fit into the framework of consumer financial incentives?

Question 6. What quality and cost measurement criteria should be used to define tiers?

Question 7. What do consumers want to know about the quality and cost measures used to create tiers?

Incentives to Select a High Value Treatment Option

Question 8. In the special case of incentives for choosing among treatment options, what information or decisionmaking tools, if any, should be offered as accompaniments to consumer financial incentives?

Implementing Consumer Financial Incentive Programs

Question 9. Should consumer financial incentives be structured as rewards, penalties, or a combination of these two approaches?

Question 10. What are the options for phasing in consumer incentives?

Question 11. How much money should be put into consumer incentives? How big does the incentive need to be to effect a change, and does the level of incentive necessary vary by the specific behavior that is the object of the incentive?

Question 12. How should we think about consumer financial incentives and their relationship to public reporting of quality scores and provider incentives such as pay-for-performance?

Consumers' and Providers' Acceptance of Consumer Incentive Programs

Question 13. Are consumers in our community ready for financial incentives?

Question 14. Will consumers believe that the incentives are designed to improve quality, or will they suspect the only goal is to cut costs?

Question 15. When and how should we engage consumers in discussions about financial incentives?

Question 16. How do consumer financial incentives fit within the broader construct of consumers' engagement?

Special Populations

Question 17. Are certain types of consumers more responsive to financial incentives than others?

Question 18. What special accommodations, if any, should be made for lower income, underserved, or sicker consumers?

Question 19. Is there a role for consumer financial incentives in an overarching disparities-reduction strategy?

Evaluating a Consumer Financial Incentive Program

Question 20. What unintended consequences should we seek to avoid?

Question 21. How can we tell if consumer financial incentives are working?


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Introduction to Consumer Financial Incentives

Private and public purchasers are acutely aware of persistent evidence of poor quality of care and ongoing increases in health care costs. Consumers' decisions can have an important impact on the quality and cost of care. This effect has led many policymakers and purchasers to consider providing financial incentives to consumers as a method to address health care quality, cost, or both. 1-2

Question 1. What are consumer financial incentives?

In health care, a consumer financial incentive is either a reward offered to influence patients to behave in a particular way or, less often, a penalty for failing to do so. By using financial incentives, employers, public purchasers, or health plans hope to encourage patients to engage in behaviors that either may improve clinical outcomes (e.g., select a high quality health care provider or adhere to care guidelines for chronic disease) or reduce cost (e.g., eliminate unnecessary emergency room visits or decrease preventable hospitalizations). If either of these occurs, the value of health care—the quality of care received and amount of clinical improvement expected per dollar expended—improves.

The rationale for using incentives is to motivate the consumer in a way that the traditional health care system does not. For instance, most patients have had little basis on which to choose a primary care provider other than the recommendations of friends and family and the provider's proximity to their home or workplace. However, some employers have begun asking their employees to select value from among provider networks of affiliated physicians and hospitals during an open enrollment period. Provider networks are stratified into tiers based on both quality and cost.

Employees are rewarded for choosing a higher value provider network through a lower premium—this is referred to as a "premium-tiered health plan." The goal of the premium incentive is to lead consumers to choose higher quality, lower cost providers and to stimulate providers to improve the value of the care they give. Other employers or plans use a similar approach to defining tiers, but ask the consumer to make their decisions about choice of provider and tier at the time that care is needed—this is referred to as a "point-of-service tiered health plan." The incentive is usually in the form of a lower copayment per visit.

Financial incentives also can be offered to encourage compliance with care plans.For example, in the traditional system a patient with diabetes might choose not to get blood sugar testing because she finds the trip to the laboratory inconvenient or she simply forgets. Offering the patient a small payment might make her more likely to get the test she knows she needs, and so the incentive improves clinical care relative to the traditional system.

Other incentives can be set up as penalties. For instance, an otherwise healthy patient in the traditional system may be willing to pay a $10 copayment for an office visit when he has a cold. If, instead, he is in a high-deductible health plan with a health savings account (HSA) from which he would pay the entire cost of the office visit, he may choose simply to use over-the-counter remedies without consulting a physician. If he makes this choice, the incentive inherent in a high-deductible health plan has reduced health service utilization relative to the traditional system without decreasing quality of care—at least in the case of a cold.

Question 2. Which consumer decisions can be influenced by financial incentives?

Many approaches to creating incentives have been taken, each addressing different aspects of consumer choice and behavior. These include:

  • Creating tiers of providers (or drugs) based on quality and cost measures and varying consumer payments based on the tier chosen.
  • Combining high-deductible health plans with savings or reimbursement accounts over which the consumer has discretion about spending.
  • Offering cash or other gifts to consumers to encourage compliance with recommended care, such as movie tickets for attending a weight loss clinic.


Distinctions among these approaches can be made along two lines: the timing of the decision, i.e., either during the annual enrollment period or when care is needed; and the health status of the patient at the time of the decision, whether healthy, chronically ill, or having an acute problem (go to Table 1).

A growing number of programs incorporate more than one incentive strategy at the same time. For example, Colorado Springs School District Number 11 offers several consumer incentives.3 Some target provider selection, including a "centers of excellence" program for some complex surgeries. In this program, if employees choose the designated hospitals, they have lower copayments, and their family members may stay in nearby hotels at no charge.

Other incentives target control of chronic diseases or health risk behaviors. To improve quality and reduce cost among patients with chronic diseases, the district's benefit design includes free blood sugar meters to encourage patients with diabetes to monitor their disease and offers lower copayments for use of generic drugs and supplies. The District also offers $15,000 in annual prizes related to diet and exercise—from bicycles, to coffee cups, to discounted health club memberships.

Question 3. Do consumer financial incentives work?

Many of the specific incentive strategies cited in Table 1 are relatively new, and there has not yet been sufficient research to know what their impact on clinical outcomes will be. Although their details vary, these strategies have two elements in common: an information component (which involves giving consumers data about the quality or cost of providers or about what constitutes good health care) and a financial component (the incentive itself, such as a lower copayment for using a higher value provider). There is not sufficient research on consumer financial incentive programs to know how well these two components work together, but there is literature about how consumers respond to the informational or financial signals when they are used separately.

Informational signals. It has been shown that in the right circumstances, consumers respond appropriately to information about quality; that is, they choose higher quality health plans or providers. For instance, Federal employees select health plans with better quality ratings;4 and, after the release of report cards about surgical mortality rates in New York State, patients were found to be more likely to select cardiac surgeons whose records showed lower mortality rates.5

In a variety of other situations, as well, consumer choices seem to reflect appropriate use of information about quality of care, although the response to information about quality is usually small.4-14 In fact, in some situations, there is no detectable consumer response to information about quality of care,15 although this lack may reflect reports about quality that are too confusing or are not marketed well to consumers.16-17

Financial signals. Although many consumers respond appropriately to financial incentives, such as differences in health plan premiums or the price they have to pay to see a provider, consumer responses to price signals can be complex, and unintended consequences are common. At least two problems have been documented regarding consumer response to financial incentives.

One is that consumers sometimes cannot distinguish between necessary and unnecessary care, especially if financial incentives are offered without accompanying information about what constitutes high quality care. In the RAND Health Insurance Experiment, consumers were randomized to one of two groups: either free care or care with increasing levels of copayment. Patients who had to pay used care less often, but they tended to forego appropriate care as well as inappropriate care.18 For example, patients with a low income who had high blood pressure were less likely to take their medications or see a doctor to adjust their medications based on their blood pressure readings.19

Worst of all, this led to an increased risk of death.20 However, none of these patients was offered any information or assistance in deciding what care was necessary, and it is conceivable—but has never been explicitly studied—that having access to such information would have improved their choices and their clinical outcomes.

The other problem is that when consumers do not have good information about the quality of providers, they might assume (rightly or wrongly) that the employer is constructing the tiers largely on the basis of price rather than quality. In fact, consumers sometimes interpret higher prices to mean higher quality.4-5 To minimize this effect, a premium-tiered provider network could be combined with credible and persuasive information showing that the quality of the lower cost network is at least as good as that of the high cost network.

Otherwise, the retirees—extrapolating from other industries in which higher price suggests higher quality, such as restaurants—may conclude that the higher cost network is of higher quality. Because quality is most important to people who are sick, and price is less important to these same people, an employer inadvertently could end up sending a price signal that results in the sickest retirees—those who utilize care the most—using the least efficient network.

These problems should not discourage the use of consumer financial incentives. They simply imply certain strategies that should be followed, depending on the type of financial incentive used.

Consumer financial incentives can be categorized into at least three groups: those that encourage selection of a high value provider, provider network, or health plan; those that promote selection of high value treatment options; and those designed to reduce health risks.

Financial incentives to select a high value provider, provider network, or health plan. These strategies involve financial incentives that encourage and reinforce consumers' decisions to choose high value providers or health plans. When consumers use price as a proxy for quality, both in choosing a health plan and in choosing a physician,4-5 the assumption that "price equals quality" can be redressed by providing data about the quality of plans or providers in addition to the information about price.

In the case of New York State, after a year in which cardiac surgeon-specific mortality rates were reported publicly, consumers began to use the report card information rather than price to identify high quality surgeons, and the impression that high price equaled high quality seemed to decrease.5

Financial incentives to select a high value treatment option. For some high cost clinical services, such as hip and knee replacements, there may be several alternative but equally good clinical options. For these situations, introducing incentives for patients to choose high value treatment options could stimulate a patient-physician dialogue about the real value of the alternatives.

For example, there has been a substantial increase in the number of consumer-directed ads related to new hip and knee replacement technologies and a plethora of medical device industry-sponsored, non-peer reviewed Web sites and chat rooms. As a result, patients with hip and knee arthritis often come to their orthopedic surgeon with a preconceived notion regarding which technology—in this case, which prosthesis—is most appropriate for them.21

Despite the fact that many of the new versions of these prostheses have not been proved superior to existing products,22-24 either in terms of clinical efficacy or safety, manufacturers charge much higher prices for the newer prostheses than for the older versions. In the current environment, these price differentials are borne by the hospital and/or the payer, with no financial accountability bearing on the patient or the surgeon.25

In response, some health plans and employers are exploring innovative benefit designs that would offer patients gold standard technology with the best long-term data regarding clinical efficacy and safety but would allow patients to "upgrade" to "premium" technologies—most of which are newer and have no long-term track record—for a higher copayment.

These plans may give patients an incentive: to discuss their purchasing decisions with their surgeons; to learn about differences in outcome—or lack thereof—among the treatment options; and at least to consider the associated costs. This also would be a situation in which using a relatively larger incentive—in this case, a penalty—might be considered because of the large difference in cost among the options and the absence of data suggesting a difference in quality among the options.

Although high-deductible health plans paired with health savings accounts (HSAs) or health resources accounts (HRAs) also create incentives to reduce utilization, these plans risk causing the behavior observed in the RAND Health Insurance Experiment, where consumers made bad decisions, foregoing both appropriate and inappropriate care.19 In implementing this approach, then, an important step would be to structure the incentives so that patients make as many optimal decisions as possible, at least when the preferred clinical protocol is clear.

For example, Aetna offers HealthFund high-deductible health plans in which preventive care and drugs for chronic diseases have first dollar coverage. This approach ensures that patients in the HealthFund program do not, for example, stop important hypertension medications because of cost.26 This strategy could reasonably be extended to other situations in which the preferred clinical option is to undergo treatment because there is nearly universal agreement that such care is warranted, such as when a patient has a new diagnosis of surgically removable colon cancer.

Financial incentives to reduce health risks by seeking care. Incentives can be applied to decisions about whether to seek preventive care (e.g., flu shots) and whether to invest the time and effort needed to control a wide array of increasingly prevalent chronic diseases (e.g., participating in an asthma disease management program). Fortunately, the available evidence suggests that consumers usually respond well to a variety of incentive strategies that target preventive or chronic care.27

The goal of the Asheville Project, run by the City of Asheville, NC, is to get Asheville employees with diabetes to use more services, such as blood sugar testing, to control their diabetes. With goals like these, one can be reasonably confident that consumers will not object, and that their physicians will express support for the program, which makes success likely. In fact, in the Asheville Project, in which patients are given free diabetes supplies and other assistance and incentives, blood sugar control improved, sick days declined, hospitalization costs fell dramatically, and the total annual cost per patient fell by more than $1,200.28

Financial incentives to reduce health risks through lifestyle changes. Many employers and Medicaid programs nationwide have introduced incentives to encourage healthy behavior. These incentives have taken many forms, including: gifts, such as free dinners; lotteries among participants for gifts or cash; direct cash payments or penalties; and free health services or supplies, such as free nicotine patches.29-43

Of the programs of this type, by far the most widely studied are programs related to incentives to quit smoking or lose weight. In most cases, these incentives have been offered in conjunction with other programs targeting the desired behavior—for example, incentives to stop smoking are offered to one group together with a smoking cessation program, whereas a control group gets only the smoking cessation program. Thus, the impact of the incentives would only be that expected over and above the effect of participation in the educational program or support group.

In studies of such programs, the impact of smoking cessation and weight loss incentives has been small. 29,32-43 Although they do boost participation in smoking cessation or weight loss programs, they generally have little lasting effect on actual smoking cessation rates or weight loss. This result came about, in part, because the control groups generally had the desired response as well. In the example of a smoking cessation incentive, both the control and incentive groups often had high quit rates as compared to groups participating in no program at all, but ultimately participants in incentive groups usually did not quit smoking more often than those in control groups.

It may be that the incentives induced people to join programs, but those people were not otherwise ready to make lifestyle changes and so did not stick with the behavior change. The more effective approach may be to facilitate lifestyle changes for those people who are ready for them—that is, people who would enroll in the program even without the incentives. If that is the case, it is more cost effective simply to offer smoking cessation and weight loss programs—or at least to reduce barriers to them—than it is to add incentives over and above better access to the programs.

Page last reviewed October 2014
Internet Citation: Checklist: 21 Questions for Purchasers to Consider: Consumer Financial Incentives: A Decision Guide for Purchasers. October 2014. Agency for Healthcare Research and Quality, Rockville, MD.