The “Tragedy of the Commons” for wellness provides opportunity for health plans

The tragedy of the commons refers to a phenomenon where a shared resource is depleted by individuals acting independently and rationally according to their own self-interest, despite their understanding that the depletion of that common resource is contrary to their long term interest. For example, consider a small community that draws clean drinking water (shared resource) from a common, shared lake. The factory businesses around the lake all produce contaminants that they dump into the lake. Each factory can invest money into reducing the contaminants, but the cost of doing so is high and the incremental benefit to the lake is low unless EVERYONE participates. Thus the cost doesn’t justify the benefit for a given factory. As a result, none of the factories implement a contaminant reduction process, thus polluting the lake for everyone in the long run.

Our collective health and wellness as a population is a shared resource undergoing the same tragedy of the commons effect today in the small employer market. Most small employers do not have a wellness program in place to prevent disease and maintain health. According to the Center for Disease Control, 75% of healthcare costs are spent on a few chronic diseases. It is well known that such costs are preventable. In fact, much actuarial evidence exists to prove that prevention and wellness works. According to the American Journal of Health Promotion there are 56 studies published that show the return on investment for wellness programs range from $3 to $5.81 for every $1 spent. This follows common sense AND the evidence is compelling.

So why isn’t everyone working towards wellness? 

In truth, some are, especially large employer groups. For them, the actuarial numbers are applicable to their large employee population where they can see claims cost savings for their population (they essentially have their own lake and keeping it clean has a direct benefit for them). However, small employers do not see the same benefit (like the factories around the shared lake). In fact, if a small employer spends time and money on a wellness program, they hardly see the immediate benefits. Rather, they end up making a very small positive contribution to the larger risk pool of other small employers (the shared lake). So, in self-interest, NO small employer implements wellness and as a result everyone suffers, hence the tragedy of the commons.
There are several reasons that small employers are not focusing on wellness:

  • Small Employee Pool: As discussed above, the return is not there for the investment. 
  • Wearing Multiple Hats: Smaller employers are usually balancing many tasks and wellness is a low priority item given the other more crucial tasks of keeping the business alive. 
  • Lack of Administrative Support: Running a wellness program may require the overhead that small employers don’t usually have. 

Small employers employ a large part of the US population. According to the small business association, they represent 99% of the US employment firms and employ about 50% of all workers. Small employers have a great influence on a large segment of our population, a segment that is being neglected from a wellness point of view. 

Opportunities and Possible Solutions from Health Plans

One of the challenges that Health Plans face today is customer retention. Especially in the light of the 2014 exchanges, health plans are concerned about commoditization and the business model shifting from a B2B model (Health plan to Employer Groups) to a B2C (Health Plan to Individuals) model. Additionally, Medical Loss Ratio requirements make it difficult since 80-85% of the premium dollars must be spent on healthcare related costs (which are primarily claims payouts today) leaving 15-20% for administrative expenses. Plans are challenged to insure populations that are healthy and cost less in claims. The tragedy of the commons for small employers poses an opportunity for plans to develop solutions that may mutually benefit small employers, the health plans themselves and the population at large. 

The following are examples of how to solve the tragedy of the commons problem while improving customer retention for health plans:

  • Create an Earn Back Deductibles Plan: Push higher deductibles on members, but allow them to earn back that deductible by participating in wellness. The more they participate, the more they earn back. 
  • Apply the Stick Model: Provide a low cost plan with the condition that employers must have their employees participate in an embedded wellness program. If not compliant, charge the employer a non-compliance fee. This is referred to as the proverbial stick method which often times proves to be quite effective. 
  • Share the Wealth through Investment: Though a bit futuristic, health plans can create a shared risk pool of all small employers in the community and provide financial rewards based on outcome measurements and participation. Small employers can think of their health insurance not as an expense, but an investment to potentially reap the financial rewards through cost savings brought by a wellness program. This is the proverbial carrot method which seems to be effective, but not as effective as the stick model. 
  • Subsidize an Integrated Care Model for Small Employers: Subsidize all or a portion of the costs for implementing basic wellness programs and provide the wellness solution as a component of the program. Since overhead is a challenge, run the program as part of the care management organization of the health plan. For example, as part of the program, go to the worksite of small employers to gather biometric data and conduct basic health education sessions, conduct coaching as necessary, etc. Alternatively, partner with a wellness provider and offer an integrated health plan and wellness solution. 
  • Leverage the Network to Create a Shared Pool: Offer a referral discount for small employers that successfully promote wellness-based health plans to other small employers. By getting more small employers in the pool, the health plan can further diversify the pool and gain the benefits via the law of large numbers. 
  • Follow the Trust Channel: Small employers are often suspicious of health plans. However, small employers enjoy a great deal of trust with Public organizations such as Chambers of Commerce. Health plans can partner with the local chambers of commerce to offer specialized plans that have a wellness component. For example, a local payer can create an insurance plan where the employers can earn an immediate premium discount if a certain percentage of their population engages in health risk assessments, health coaching, biometric screenings, etc. Especially small payer organizations can quickly and easily assemble such products that will appeal to this segment of the market. 
  • Presence in Community: Health plans can become more present in the minds of the local communities by partnering with other public organizations that focus on wellness and promote wellness through competition and community recognition to small employers. Small employers are always interested in building their brand in the community. Such awards can help them do so. 

In conclusion, though the challenge at hand may be difficult, there are simple and easy ways to start addressing the wellness gap we are experiencing. All it takes is an innovative mindset and a shift in perspective. 

For questions or comments, contact Munzoor Shaikh at

Phone: 312-602-4000
222 W. Adams
Chicago, IL 60606
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