The “Peanuts” Effect

Volpp sees promise in the lottery-based programs because they incorporate so many of the insights gained from behavioral economics, including the importance of frequent feedback and incentives and the threat of regret. Lotteries are likely more effective than direct payments if the expected value of the reward is small because most people tend to discount rewards if they are too small -- a phenomenon known as the "peanuts" effect -- and because most people overestimate their chances of winning big in a lottery.

Two small pilot studies of 20 patients taking the drug warfarin found that a daily lottery significantly increased the proportion of patients who took their daily medication. But like the weight loss study, the patients returned to their bad habits once the financial incentive was removed.

With every study, Volpp finds new questions to consider about how programs are designed, how much of a financial reward is optimal and how incentive-based programs could be combined with other approaches to improving patient behavior. "The challenging or dissatisfying part is that each study just opens up a new chapter in terms of how we think about defining further progress," said Volpp. "There are all these questions that come up; for example, in the smoking study, what would happen if we gave out $1,000 or $1,500? We really don't know."

Pauly pointed out that there are other issues that incentive programs must overcome, such as regulatory and legal barriers, employer reluctance to invest in programs that might not pay off until years later when many workers will be at different companies, and the resistance from employees themselves, who may see such incentive-based programs as overly paternalistic. It will also be tricky for employers to establish incentive-based programs without creating resentment among workers who don't have any bad health habits to kick.

Despite the stumbling blocks, incentive-based approaches still hold promise, in part because "nothing else has worked," Pauly said. "You could fill up a basement with failed documents on how to curb health care spending."

Volpp agreed. As a physician himself, he has been frustrated in his own clinical practice with patients who were unable to follow through in changing their health behaviors, even in situations where they were clearly at high risk of suffering significant impairments in quality of life or life expectancy. "You see the consequences of unhealthy behaviors all the time," he said. "A lot of the existing approaches just don't work. It's clear that we need new approaches to help people."

Published June 29, 2009

Originally published June 24, 2009, in Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania. Republished with permission.