Step and Save: A Wearable Technology Based Incentive Mechanism for Health Insurance

The market of wearables are growing explosively for the past few years. The majority of the devices are related to health care and fitness. It is embarrassing that users easily lose interest in these devices, and thus fail to improve health condition. Recently, the “be healthy and be rewarded” programs are gaining popularity in health insurance market. The insurance companies give financial rewards to its policyholders who take the initiative to keep healthy. It provides the policyholders with incentives to lead a healthier lifestyle and the insurer can also benefit from less medical claims. Unfortunately, there are hardly any studies discussing how to design the incentive mechanism in this new emerging health promotion program. Improper design would not change policyholders’ unhealthy behavior and the insurer cannot benefit from it. In this paper, we propose a mechanism for this health promotion program. We model it as a monopoly market using contract theory, in which there is one insurer and many policyholders. We theoretically analyze how all parties would behave in this program. We propose a design that can guarantee that policyholders would faithfully participate in the program and the insurer can maximize its profit. Simulation results show that the insurer can improve its profit by 40% using the optimal contract.