Final Rule Provides Wellness Incentive Guidance

By Stephen Miller, CEBS May 30, 2013

updated 6/5/2013

The U.S. departments of Health and Human Services, Labor and the Treasury issued a final rule on employment-based wellness programs in compliance with the Patient Protection and Affordable Care Act (PPACA), published in the Federal Register on June 3. The final rule will be effective for plan years beginning on or after Jan. 1, 2014, and applies to both grandfathered and nongrandfathered health plans.

The new rule supports workplace health promotion and prevention as a means to reduce the burden of chronic illness, improve health and limit growth of health care costs, while ensuring that individuals are protected from unfair underwriting practices that could otherwise reduce benefits based on health status.

Specifically, it outlines standards for nondiscriminatory health-contingent wellness programs, which generally reward individuals who meet a specific standard related to their health. Examples of health-contingent wellness programs include programs that provide a reward to those who do not use, or decrease their use of, tobacco, or programs that reward those who achieve a health-related goal, such as a specified cholesterol level, weight, or body mass index, as well as those who fail to meet such goals but take certain other healthy actions.

Monetary Incentives

Monetary incentives covered by the statute and final rule include rewards—such as a discount or rebate of a premium contribution, a waiver of all or part of a cost-sharing mechanism including deductibles, co-payments or co-insurances—and penalties such as a surcharge or other disincentives.

The final rule implements PPACA provisions that:

  • Increase the maximum permissible reward or penalty under a health-contingent wellness program offered in connection with a group health plan (and any related health insurance coverage) from 20 percent to 30 percent of the total annual cost (premiums) of individual-only coverage.
  • Increase the maximum permissible reward or penalty to 50 percent of the cost of individual coverage premiums for wellness programs designed to prevent or reduce tobacco use.

Aside from lost productivity, the average excess health care costs of smokers—who have higher rates of lung disease, heart disease, various cancers and other illnesses—is $2,055.77 according to a comprehensive study by researchers at Ohio State University.

Several examples that illustrate how to calculate the applicable percentages are included in the new rule. For instance, assume that an employer-sponsored group health plan has an annual premium for employee-only coverage of $6,000 (of which the employer pays $4,500 per year and the employee pays $1,500 per year). The plan offers employees a health-contingent wellness program focused on exercise, blood sugar, weight, cholesterol and blood pressure. The reward for compliance is an annual premium rebate, not to exceed $1,800, which is 30 percent of the total annual cost of employee-only coverage ($6,000 x 30 percent = $1,800).

At the same employer, assume the wellness program is exclusively for tobacco-prevention. Employees who have used tobacco in the last 12 months and who are not enrolled in the plan’s tobacco cessation program are assessed a premium surcharge in addition to their employee contribution toward the coverage. The surcharge must not exceed $3,000, which is 50 percent of the total annual cost of employee-only coverage ($6,000 x 50 percent = $3,000).

The rule allows plans to use reasonable methods to apportion rewards among family members including, for instance, when one family member fails to qualify for the reward but other family members do.

Alternative Health Standards

The final rule requires that health-contingent wellness programs be reasonably designed and uniformly available to all similarly situated individuals. In addition:

These final regulations also do not require plans and issuers to establish a particular reasonable alternative standard in advance of an individual's specific request for one, as long as a reasonable alternative standard is provided by the plan or issuer (or the condition for obtaining the reward is waived) upon an individual's request. Plans and issuers have flexibility to determine whether to provide the same reasonable alternative standard for an entire class of individuals (provided that it is reasonable for that class) or provide the reasonable alternative standard on an individual-by-individual basis, based on the facts and circumstances presented.

Under the final rule there are differences in the alternative health standard criteria that apply to activity-based wellness programs (in which a reward is premised on participating in specified activities) and outcome-based wellness programs (in which a reward is premised on meeting certain health goals). For example, according to an analysis by Seyfarth Shaw LLP:

  • An activity-based program must allow a reasonable alternative method for obtaining the reward (or waive the applicable standard) for any individual for whom it is medically inadvisable to attempt to satisfy the standard or unreasonably difficult due to a medical condition to satisfy the standard. Notably, the plan may seek verification and require a doctor’s note.
  • An outcome-based program must offer a reasonable alternative method for obtaining the reward to (or waive the applicable standard for) a much broader group. It must allow any individual who does not meet the initial standard based on the measurement, test or screening to use an alternative standard. In other words, every individual who doesn’t meet a targeted biometric (or similar standard) must be provided with an alternative method of obtaining the reward, regardless of any medical condition or other health status, and thus verification by the individual's doctor would not be required.

As noted above, for activity-based wellness programs it is permissible to seek verification, such as a statement from the individual's personal physician, that a health factor makes it unreasonably difficult for the individual to satisfy, or medically inadvisable for the individual to attempt to satisfy, the generally applicable health standard. On the other hand the final rules states that:

If an individual’s personal physician states that a plan standard (including, if applicable, the recommendations of the plan’s medical professional) is not medically appropriate for that individual, the plan or issuer must provide a reasonable alternative standard that accommodates the recommendations of the individual’s personal physician with regard to medical appropriateness.

"This deference to an individual’s personal physician’s recommendation, with no ability on the part of the plan or policy, or its own medical professionals, to determine whether the recommendation is reasonable or not, could present challenges in operation," according to an alert issued by consultancy PricewaterhouseCoopers. "Plans may want to consider how to implement this requirement and still retain meaningful and cost-effective outcome-based programs."

As compared with the earlier proposed rule, "One key change was that individuals cannot be overly burdened with requirements in order to benefit from a wellness incentive, nor can they be required to complete the wellness program in an inappropriate time frame," said Austen Townsend, an employee benefits attorney in the Washington, D.C., office of Proskauer Rose LLP, to SHRM Online. "For example, you can’t make someone complete a nightly one-hour class for a full year in order to get an incentive," as that would likely be deemed excessive.

Penalties for Noncompliance

Aside from any participant lawsuit concerning whether a wellness program impermissibly discriminates against people based on health status—which could result in damages and attorneys’ fees—there are statutory penalties for noncompliance. Under the Health Insurance Portability and Accountability Act (HIPAA), the Internal Revenue Service may impose on the sponsoring employer an excise tax penalty of $100 per each day of noncompliance per each affected individual. Separately, the U.S. Department of Labor is actively auditing plans for compliance and could bring a civil action against an employer to enforce these requirements.

"The final regulations are not intended to establish requirements for all types of programs or platforms that could be called a wellness program," explained Townsend. "The regulations specifically say that they only establish criteria for an affirmative defense that can be used by a plan in response to a claim that the plan impermissibly discriminated against an individual based on health status in violation of HIPAA. That will help employers that are considering non-traditional wellness incentives that might not meet every technical detail in the regulations. Nevertheless, employers’ liabilities can be more effectively managed by following the regulatory safe harbors."

One key challenge for employers is that the Equal Employment Opportunity Commission (EEOC) has not issued definitive guidance on what type of wellness programs might separately violate the Americans with Disabilities Act (ADA). "That means employers might comply perfectly with the regulations and still have a potential issue with ADA compliance, depending on what position is taken by the EEOC," said Townsend (for more on this issue, see the SHRM Online article "Guidance Sought on Wellness Efforts and Anti-Discrimination Laws").

"Employers should remember that the point of the regulatory safe harbor rules is to help them demonstrate that they are not discriminating impermissibly against people based on their health status," Townsend noted. "Therefore, a key component to the defense is to demonstrate in practice and in writing that participation is both voluntary and for the benefit of the affected individuals."

The federal departments said they anticipate issuing future subregulatory guidance to provide additional clarity on wellness programs and potentially proposing modifications to this final rule as necessary.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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