Economics White Paper

Employer to increase the premium of employees with lifestyle-related illness
In the recent years, there has been an increase in costs related to health care which has, in turn, weighed heavily on employers budgets. In 2017 the annual premium raised to $18,764 from $18,142 in the previous year. This trend seems to continue, and according to a Wall Street Journal dated 30th October 2017 by Stephanie Armour, the standard health plan is predicted to increase more than 30% this year. The decision to terminate the subsidiary payments by the current president in October last year is one of the factors that will contribute to a higher increase in the premium rates. Additionally, the number of insurers in the federal exchange program is also expected to reduce from 167 to 132 which will result to an insurer being selected by several consumers at the rate of 30% from 20% which will lead to increase in premiums.
Previous research has indicated that unhealthy behaviors translate to higher use and cost of healthcare which in turn leads to high premiums. In 2015, a report by Pay Claire specified that smoking cigarettes and obesity-related health problems did cost the US healthcare system a total of $112.8 billion annually, i.e., $85.8 billion and $27 billion respectively. Additionally, according to American Medical Association 25cents of every $1 for healthcare, is used in the cure and management of illnesses that arise from these lifestyle habits. The individuals who engage in these behaviors pay a small percentage of the cost associated with the ailments.

Therefore, coming up with policies that redistribute these expenses is indispensable.
In this case, the company should charge those workers with lifestyle-related illness more. Instituting a policy that will ensure an increase in the contribution of the premiums, can be very effective. In this case, charging the employees with lifestyle-related illnesses an extra 10% of the premium is a good step for the company to stomach the rising costs of healthcare of its employees. The governing idea for this approach is the incorporation of individual employee responsibility to achieve better behavior in regards to their health. Therefore, this differential has its basis on the economic principle of incentives. This standard maintains that people always respond to inducements, i.e., an incentive will cause a person to take action.
This principle also argues that since people make decisions based on a cost-benefit analysis, they react to incentives, e.g., by imposing high taxes on cigarettes to reduce the rate of smoking. Similarly, charging an extra 10% of the premium is a disincentive for the employees who have lifestyle-related illnesses. To avoid paying this 10% additional premium, which is an incentive for the other employees with no lifestyle-related diseases, they will be motivated to participate in programs or activities that can contribute to better health, e.g., signing up in a gym, health programs at work, etc. This approach will reduce the costs that the employer incurs from healthcare of the employees by minimizing the costs that arise from the care of the affected employees.
Although little is documented on the Return of Investment (ROI) of incentives, there is a clear indication of the ROI of the wellness programs and activities which stands at $3 for every $1 according to the Wellness Council of America. Additionally, the effectiveness of this approach can also be seen from other companies who have successfully implemented it and are getting a positive result, e.g., the Wal-Mart. this company charges employees who smoke higher premiums compared to their colleagues on the basis of the fact that, “smokers consume 25% more health care services than non-smokers.”
Even though this approach is effective, it is worth noting that not all of the illnesses in this category arise from lifestyle behaviors, i.e., some are hereditary,e.g., lung cancer. Therefore, insurance screening and actuarial efforts and are necessary to assess the causes and any potential risks to individual employees. This will be very helpful in coming up with premiums that are tailor-made for specific employees based on the risk associated with each. Apart from these customized premiums, the employer can design and offer free programs that help the affected employees, e.g., a free counseling program that helps smokers quit. Using deductibles, narrowing the drug selections and coming up with higher co-pays, are other approaches the employer can adopt to reduce the costs incurred from lifestyle-related illness of the employees.