Monetary incentives or financial rewards are an external financial stimulus that influences the ‘relative price’ of a behaviour relative to the status quo. They reduce (e.g., subsidy, cash transfer) or increase (e.g., co-payment, coinsurance, tax or a penalty) the costs of action or inaction. These incentives can be implemented ex-post or at the point of use (e.g., a user fee), or ex-ante or, before its use (e.g., insurance coverage). Although, the logic that explains the effectiveness of such incentives in the context of health and health care has been long established, its behavioural mechanisms are still subject to discussion and are far from clear-cut. This chapter attempts to shed some light on the matter, and broadly analyse when ‘monetary incentives work’ and what can make them ‘backfire’. In designing incentives, we will expand on the concept of motivation compatibility.

This chapter focuses on describing the conditions under which monetary incentives (M) do not work, and more specifically claims that when considering monetary incentives, other non-monetary or social incentives (S) that help overcome people's cognitive hurdles to engage in desirable health and healthcare behaviour should be combined with them. According to contract design theory, when quality is not observable, we face significant challenges in designing healthcare contracts. This is important in incentive design. The problems we typically face in these circumstances are that the outcomes for which we design the incentives are not always easy to observe. Contracts based on trust appear to be more appropriate in these circumstances.