Employers can offer increased incentives to employees for participation in a wellness program or for meeting certain health status targets beginning in 2014 under the Patient Protection and Affordable Care Act signed into law by President Barack Obama on March 23, 2010. The law will permit rewards or penalties such as premium discounts of up to 30 percent of the cost of coverage.
Existing wellness regulations developed under the Health Insurance Portability and Accountability Act (HIPAA) permit wellness incentives of up to 20 percent of the total premium, provided that the program meets certain conditions. The health reform law increases the amount of the potential reward/penalty to 30 percent of the premium, with some leeway for federal agencies to increase that amount after they conduct a study on wellness programs. In addition, the bill would create a $200 billion, five-year program to provide grants to certain small employers (fewer than 100 employees) for comprehensive workplace wellness programs. The grants would go to small employers that did not have a wellness program when the law was enacted.
"The market has already marched ahead of where Congress is on this," says Jay Savan, a senior consultant at Towers Watson. "There are a variety of innovative strategies being used by employers to encourage participation in wellness programs. It's a nice bump, but I don't think it's going to cause a rush of employers to move forward when previously they weren't going to."
"From a policy perspective, I don't know too many employers that are hitting the existing 20 percent level," says Kathy Bakich, senior vice president and national health compliance practice leader at The Segal Co., an HR consultancy. In her view, employers are more concerned about the effectiveness of their programs than the amount of the incentive discount.
But some employers have been lobbying for a higher rewards ceiling. In a June 2009 op-ed column in the Wall Street Journal, Safeway CEO Steven Burd said of his company's Healthy Measures wellness program:
"When surveyed, 78 percent of our employees rated our plan good, very good or excellent. In addition, 76 percent asked for more financial incentives to reward healthy behaviors. We have heard from dozens of employees who lost weight, lowered their blood-pressure and cholesterol levels, and are enjoying better health because of this program. Many discovered for the first time that they have high blood pressure, and others have been told by their doctor that they have added years to their life.
"Today, we are constrained by current laws from increasing these incentives. We reward plan members $312 per year for not using tobacco, yet the annual cost of insuring a tobacco user is $1,400. Reform legislation needs to raise the federal legal limits so that incentives can better match the true incremental benefit of not engaging in these unhealthy behaviors. If these limits are appropriately increased, I am confident Safeway's per capita health care costs will decline for at least another five years as our work force becomes healthier."
"The effectiveness of financial incentives is closely tied to the amount you provide," concurs Thom Mangan, CEO of Corporate Synergies, a Mount Laurel, N.J.-based health insurance consultancy that serves middle-market companies. In his experience, the perception of avoiding a penalty, such as not getting a discount, has a greater impact on changing behavior than does the opportunity to receive a reward. "Absent a truly massive carrot to motivate employees, then unless you have a 'stick' and provide some sort of penalty for not participating, you won't see anybody but the healthy take advantage of a wellness-based plan," he comments.
One way to put this to employees, Mangan offers, is to say: "If you participate, then your premiums are 10 percent less. If you don't participate, then your premiums are not discounted. As the renewal comes about and premiums are 8 percent to 12 percent higher, then those who are participating don't get hit with that, but those who are not participating are subject to the increase."
It's important to note, Mangan adds, that the incentive discount is 10 percent of the total premium cost, "not just 10 percent of whatever the employee's share of the premium might be. If you've got a family plan that's running you $16,000 a year, missing out on a 10 percent discount is a pretty big stick. And employers can do this now."
Still, Mangan wishes that employers had been allowed to provide even higher discounts. "If Congress really wanted to bend the cost curve, it would have permitted much bigger incentives to draw people into healthy lifestyles," akin to the way that life insurers can charge smokers much higher premiums based on actuarial tables showing their greater likelihood of early death. "You can't do that with health insurance, and it's a shame because you've got to have that stick to drive people to wellness," Mangan says. "We all know we should practice healthier habits, but knowledge is not action."
Bakich emphasizes, however, that when offering discounts for healthy behaviors, employers must make sure that they meet all HIPAA requirements, including offering an alternative to employees who can't meet the standard because of physical reasons. "Employers have to be careful that they are not just putting in the penalty, but they're offering a program that has a sound medical underpinning, and that they provide a real alternative for people who can't meet the standard because of physical limitations—and in those cases, for example, reward participation rather than goal achievement," she recommends.
Wellness Incentives: Running Afoul of the Excise Tax?
The health reform law is likely to give a short-term boost to the use of financial incentives in wellness plans, says Corporate Synergies CEO Thom Mangan. But employers should beware of triggering the 40 percent excise tax on high value or "Cadillac" plans that takes effect in 2018, for plans valued annually at more than $10,200 for individuals and $27,500 for families. Employers spending on wellness programs would add to their health plan's value, pushing them closer to that trigger.
"Those who are not early adopters in using wellness initiatives to curb the cost of their health insurance will end up being hurt if they try to launch a program in 2018 or later," Mangan notes, because "the cost curve does not come down for two to three years once you've implemented a wellness program."
The excise tax will become a disincentive for employers to add to the cost of their health benefits and, as a result, health care reform could have a reverse effect on employers’ efforts to promote wellness and healthy behaviors, in Mangan's view.
"We're strongly encouraging companies to step up their wellness efforts today to better control their future health spending, making it more likely they'll avoid the tax," Mangan advises.
In a March 2010 letter to Congress, the Society for Human Resource Management urged lawmakers not to count the value of supplemental benefits such as wellness plans toward the excise tax threshold.
Stephen Miller is an online editor/manager for SHRM.
More Employers to Penalize Workers for Unhealthy Behaviors, SHRM Online Benefits Discipline, March 2010
SHRM Online Benefits Discipline
SHRM Online Health Care Reform web page