Fat Fees and Smoker Surcharges: Tough-Love Health Incentives

Correction Appended: Nov. 23, 2009

Psychology Professor Anita Blanchard has a pretty sweet deal with her employer. Even if the 40-something mother of three leaves her job at the University of North Carolina at Charlotte, the state of North Carolina guarantees her premium-free health insurance that will cover 80% of her health care costs for life. But's there's a hitch: she can't gain too much weight or start smoking. If she does, she could be on the hook for an additional 10% of her health care tab.

Companies have long promoted healthier behavior by subsidizing gym memberships and smoking-cessation classes. But several private and public employers have started tying financial incentives to their health-insurance plans. North Carolina this year became the second state to approve an increase in out-of-pocket expenses for state workers who smoke and don't try to quit or who are morbidly obese and don't try to lose weight. Alabama was the first to pass what critics call a fat fee, in 2008, and several state insurance plans have started imposing a $25 monthly surcharge on smokers.

There's even a push in Congress to let employers further link lifestyles to insurance premiums. Right now companies that run their own insurance programs can reward employees with bonuses or premium reductions of up to 20% if they meet certain health guidelines. John Ensign, Republican Senator from Nevada, and Tom Carper, Democratic Senator from Delaware, co-sponsored an amendment to the current health care bill that would raise the limit to as high as 50%. The Senate Finance Committee gave it a thumbs-up in September.

Nationwide, employee insurance premiums have increased 131% over the past decade, according to the Kaiser Family Foundation. And it's well documented that smoking and obesity are associated with higher medical costs. That helps explain why 34% of respondents in a new Aon survey of more than 1,300 employers said they plan to introduce or increase financial incentives to encourage participation in wellness programs and why 17% plan to do the same for disease-management programs.

But there's a big difference between handing out gift cards and jacking up people's co-pays. The Tar Heel State in particular has been criticized for using a big-stick approach. Starting in July, state workers who smoke will be moved from the plan that covers 80% of health care costs to one that pays 70%, an out-of-pocket difference of approximately $480 a year, unless they agree to enroll in a smoking-cessation program.

In 2011, the state will turn its attention to the obese. Workers who have a body mass index (BMI) below 40--e.g., someone who is 5 ft. 6 in. and weighs 250 lb.--can remain in the 80% plan for the first year. But after that, they need to either have a BMI of 35 (5 ft. 6 in., 217 lb.) or enroll in a weight-loss program to qualify for the less expensive plan.

Alabama, rather than adopting penalties, is offering discounts on state workers' $70 monthly premiums. To get $30 off for not using tobacco, participants have to sign a form under penalty of perjury. (An audit of relevant medical records could result in back-billing and a recall of claims.) Since the plan started giving such a discount in 2005, it has seen a 4% decline in the number of smokers.