By Katherine Reynolds Lewis
FORTUNE -- CVS Caremark (CVS) recently made headlines for rolling out a $600 penalty on workers who fail to report biometric data such as weight, body fat, blood sugar, and cholesterol in an annual screening. The controversial move is likely just the start of a new wave of workplace programs that aim to encourage healthier employee behavior through targeted incentives.
"You're going to see over the next three to five years lots of employers rewarding employees for successfully improving their health risk," says Jim Winkler, chief innovation officer for HR consultancy AON Hewitt, which found that 58% of the nearly 800 employers it surveyed plan to penalize workers who fail to take appropriate actions to improve their health.
Companies are expanding their wellness programs in the face of climbing health insurance costs, which in 2013 are expected to reach an average of $11,188 per employee, up from $7,874 in 2007, according to AON Hewitt. And many are switching from solely offering carrots -- rewards for making healthy choices -- to include sticks.
Of the $2.7 trillion spent each year on health care, about 50% to 60% relates to conditions that could be improved through changes in diet, exercise, and stress management, says Adam Bosworth, co-founder of online wellness company Keas and former head of Google Health.
The recently passed Affordable Care Act clarified employers' ability to financially penalize employees for unhealthy behavior. The act raised the allowed penalty, or reward, to 30% of health care premiums, from 20%. The federal health care reform package also cast a spotlight on the effectiveness of using payments and fines to influence employees' behavior -- regardless of whether they are weighted more on punishment or rewards.
"These programs, when it comes to obesity and weight management, are simply not very effective. All the studies have shown a very marginal weight loss over 12 months," says Morgan Downey, editor and publisher of The Downey Obesity Report, which covers science and public policy on obesity. "The best scientists and clinicians in the world have trouble getting these conditions under control. Why do we think HR can do it?"
Unlike smoking, high blood pressure, and glycemic control -- issues that physicians have a range of options to treat and control -- there are no clinically proven pharmaceutical or treatment protocols for obesity, says Downey. Moreover, the federal regulations proposed under health care reform contemplate such possibilities as an employer requiring its entire workforce to achieve a body mass index of 27, and fining those who cannot meet the standard or make consistent progress toward it.
A majority of adult Americans are overweight or obese. Most fail in their attempts to lose weight, researchers find, but the majority of those who succeed return to baseline weights within five years. "The majority of American women are on a diet at a given time," says John Cawley, a Cornell University economist and public policy professor. "It's not that people don't know, and it's not that they aren't trying. It's that these are really hard behaviors to change."
A recent study of a workplace program that offered financial incentives for losing weight to 2,635 workers found only modest weight loss and a high dropout rate, according to Cawley, who published this study with Joshua Price of the University of Texas at Arlington. "We're at an early stage with figuring out how to optimally design these incentive schemes," says Cawley.
Culture and level of trust within an organization are the most important elements of a wellness program, according to Winkler. Rewards or penalties around healthy behavior must be give in the context of information, interventions, and programs that make it possible for employees to reach their health goals. Programs that are personalized to the workers' personalities, health risks, and other variables are more likely to be successful -- but are also harder to administer.
Eight primary risks can drive up health care costs and lead to diseases: smoking, sedentary lifestyle, unhealthy diet, excessive alcohol use, lack of preventive screenings, patient non-compliance, inadequate sleep, and poor stress management. Rather than tackle all eight at once, an employer should assess where the greatest risks and costs exist among their employees and go from there, Winkler says.
But don't expect the same old glossy brochures and HR-speak as new programs roll out. Organizations are getting creative. "Employers that have had success in connecting with people to change behavior have used marketing tactics as opposed to traditional HR benefits communications," notes Winkler.
Rather than simply threatening or bribing employees, a growing number of employers are launching competitions and gaming applications that encourage achieving health goals in a fun way. The Hewitt study found that 22% of employers surveyed are interested in incorporating gaming concepts into their wellness programs.
Keas believes that penalties don't work in changing individuals' behavior, says Bosworth. Rather, the company has found success through a fun and social rewards-based approach that combines games, achievable goals, healthy habit building, and small coworker teams that support health goals. A case study Keas conducted at a Florida hospital found that 46% of employee participants improved their fresh produce intake and exercise, 16% improved their stress level, and 30% lost a modest amount of weight.
Also going beyond monetary rewards or penalties is the Global Corporate Challenge, in which teams of employees compete in their virtual progress walking around the world, with a 16-week jump-start period beginning May 23 and another nine months of follow-up. "Payment doesn't encourage personal responsibility; it actually compromises it," argues GCC president and founder Glenn Riseley.
At the end of previous years' challenges, participants lost an average of 9.9 pounds; 66% reported decreased stress; and of those with high-risk blood pressure, 54% had reached low-risk levels. Past participants include Pearson, Warner Brothers, and Rolls Royce, according to the GCC web site.
The vast majority of American companies, 83% according to Hewitt's survey, already offer incentives for participating in wellness programs. Expect more to expand those rewards and penalties to cover healthy behaviors and eventually to rest on specific results.
"A lot of people will feel that it's somehow mean to do this," says Cawley. "What's not fair is the current system where everybody else in the health insurance pool is subsidizing the health care costs of the morbidly obese."
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