Proposed Regulations Charge Wellness Programs

Proposed Regulations TurbochargeHealth-Related Wellness Programs
*   Federal authorities have issued proposed regulations that would, when finalized, implement the federal health reform law’s welcome changes to wellness programs.

*   The proposed rules would increase by 50 percent the maximum wellness-related incentive or penalty a health plan may impose due to one’s health condition…and would increase by a whopping 150 percent the maximum incentive for such a program targeting tobacco users.

Federal authorities recently issued proposed regulations on several important issues related to the Patient Protection and Affordable Care Act (PPACA), the federal health reform law. One set of proposed rules would turbocharge employment-based wellness programs. This Alert describes the proposed regulations relating to wellness programs; another Alert–scheduled to follow shortly after this one–will deal with the other recent guidance.

The newly proposed regulations largely mirror regulations finalized in 2006 governing workplace wellness initiatives that condition health plan-related incentives on enrollees’ health conditions. But the newly proposed rules would do two important things, if finalized: First, they would dramatically increase the amount of the permissible incentive a health plan may offer based on someone’s health condition, particularly tobacco use. Secondly, they clarify several issues not resolved by the 2006 regulations, in some cases by imposing additional requirements upon wellness programs.


The Health Insurance Portability and Accountability Act (HIPAA) generally prohibits a health plan from discriminating as to eligibility, benefits or premiums based on the enrollee’s health condition or claims history.

But HIPAA carves out an exception for certain wellness programs, and permits a health plan to grant a reward or impose a penalty in an amount up to 20 percent of the total cost of an employee’s coverage. Note that the total cost means the employee- and employer-paid portions of the premium. For example, if it costs a plan $500 per month to supply employee-only coverage, the plan may make unhealthy employees pay an additional $100 more ($500 x .20) per month for their coverage than healthy employees pay for theirs. The reward or penalty may impact premiums, cost sharing (e.g., deductibles), benefits, etc.

Upping the Ante

The PPACA expressly permits non-grandfathered health plans to increase the incentive or penalty amount from 20 percent to 30 percent of the total cost of the individual’s coverage (an increase of 50 percent), for plan years beginning after 2013. The proposed regulations allow for the same increase.

But PPACA also allows federal regulators to increase the incentive amount to a whopping 50 percent of the total cost of coverage, via regulations (a 150 percent increase). The newly proposed regulations take advantage of this authorization to push the maximum incentive amount to 50 percent of the total cost of coverage, where the wellness program targets tobacco users. In the example above, the plan would be able to require tobacco users to pay $250 per month more for their coverage (i.e., total employee contribution of $400) than non-smokers are asked to pay for theirs (i.e., $150).

Where a wellness initiative combines incentives or penalties related to tobacco use with incentives or penalties related to other health conditions, the aggregate maximum reward or penalty can’t exceed 50 percent of the total cost of the employee’s coverage, and the non-tobacco-related incentive or penalty–considered alone–can’t exceed 30 percent of that cost.

As we have long expected, the regulations would also extend the new, larger limits to grandfathered plans, for the sake of consistency.

Participation-Based Wellness Programs

The regulations acknowledge that health plan-related rewards or penalties that are based simply on participation, for example, completing a health risk assessment or biometric screening, without regard to results, are not limited to the 30 or 50 percent maximums. Thus, a wellness initiative may stack a participation-based reward or penalty atop the maximum health condition-related reward or penalty.

In the example immediately above, the plan imposes a $250 per month surcharge on tobacco users. The plan could levy an additional surcharge, such as $20 or $50 per pay period, upon those who decline to participate in a health risk assessment or biometric screening, even though the two surcharges combined exceed 50 percent of the total cost of coverage.

Where dependents are allowed to participate in the health plan’s outcomes-based wellness program, the maximum reward or penalty is based on the total cost of the coverage tier, for example, employee-plus-one, employee-plus-family, etc., in which the employee is enrolled.1

Other Financial Incentives

One interesting clarification contained in the newly proposed regulations deals with financial incentives that might be something other than a premium differential, cost-sharing adjustment, or a different benefit. Lawyers have debated whether HIPAA’s general prohibition on health plan discrimination due to health status even applies if the wellness incentive is unrelated to the health plan. For example, what if an employer simply gives additional cash to healthy employees?

The proposed regulations might be read to imply that cash or any other financial reward is just the other side of the incentive coin. That is, the regulations might imply there’s no difference between a premium discount that puts more cash in the enrollee’s pocked by reducing his or her required contribution, and putting more cash in the employee’s pocket directly.We hope the authorities will clarify this when they finalize the regulations.

Reiterating Old Conditions, and Adding a Few New

Under the current HIPAA regulations governing outcomes-based wellness programs, a health plan looking to grant rewards or impose penalties must jump through five hoops, including the limitation on the size of the reward or penalty. Other important requirements include:

*   The wellness program must be reasonably designed to promote good health;
*   Individuals who can’t attain the plan’s desired goal (or shouldn’t try) due to a health condition must be given an alternative standard to attain the reward or avoid the penalty;
*   The plan must notify individuals about the availability of alternative standards; and
*   Individuals must have the chance to qualify for the reward–or avoid the penalty–at least once per year; this doesn’t mean the plan must keep the wellness program in place year after year.

The recently proposed regulations would tinker with all but the last of these requirements.

Reasonably Designed to Promote Good Health

Many wellness initiatives include a health screening like a biometric exam or a health risk assessment. Under the newly proposed rules, a wellness initiative would not be considered “reasonably designed to promote good health” unless it meets a new condition. If a surcharge is imposed, or reward denied, based on a screening result (e.g., the individual’s cholesterol level, blood pressure or weight is outside normal limits, etc.), the initiative would have to make available a reasonable, alternative method for the individual to get the reward or avoid the penalty.

In other words, it appears that where the award or penalty depends on the results of a screening, it would not be enough for the plan to say to the individual, “Go out and try to lose a few pounds and circle back to us later…we’ll re-evaluate you.” It appears the wellness initiative would have to be more formal, and actually offer a method, such as coaching, intervention, education, etc., for the individual to qualify for the reward or avoid the penalty. Federal authorities have invited comments on the need for this new condition.

Alternative Standard or Goal for Those Unable to Meet the Wellness Initiative’s Goal, Due to a Health Condition

Current HIPAA wellness program regulations say that if an individual cannot meet the initiative’s desired goal, such as keeping one’s weight within normal limits, or it would be medically inadvisable for the individual to even try, the wellness initiative must make an alternative standard or goal available to the individual. Often, the wellness initiative will simply rely upon the individual’s physician for a recommendation.

For example, assume a wellness initiative targets workplace obesity. Employees whose weight exceeds normal limits by at least 20 pounds are told that they will pay extra, within the 20 or 30 percent maximum differential, for their health insurance. But if they lose 20 pounds over the ensuing three months the plan will lift its premium surcharge.

Joe is substantially overweight, but due to a thyroid condition Joe cannot reasonably lose 20 pounds over the three months. Joe’s physician suggests that 10 pounds is a reasonable goal. Mary is also substantially overweight, but due to knee, hip and heart ailments, Mary’s doctor believes it would be dangerous for Mary to try to lose 20 pounds in three months. The doctor recommends to the plan or its wellness vendor that 10 pounds over three months is a reasonable goal. The plan accepts these alternative standards for Joe and Mary.

The proposed regulations would require a few additional things of the wellness initiative:

*   If the initiative’s alternative standard is completion of an educational program, the plan must pay for the program. For example, if instead of accepting the recommendation from Joe’s doctor, the plan were to tell Joe, “We understand you can’t lose 20 pounds in three months, so your alternative standard is to attend an educational program on healthy eating habits,” the plan would have to make the educational program available to Joe, and pay for it.
*   If the alternative standard is participation in a diet program, the plan must pay the program’s membership or participation fee, but would not have to pay for cost of food.
*   If the alternative standard is to comply with recommendations of a medical professional who is an employee or agent of the health plan, and the employee’s own physician disagrees with the alternative standard, the alternative standard offered to the employee must include the recommendations of his or her own physician.

In short, the proposed regulations would often require the plan to actually offer or make available some kind of formal program consistent with the wellness goal, such as a formal smoking cessation or weight loss program in which employees may participate to avoid a surcharge, and in some cases may have to pay for the formal program.

Note that in some cases–where the program is not supplying medical care–the cost of a program paid by the employer or plan will be imputed taxable income to the employee.

The parameters around or limitations on these requirements are not entirely clear, but we suspect federal authorities will clarify them when the regulations are finalized.

Notification of the Availability of an Alternative Standard

Existing HIPAA regulations dealing with outcomes-based wellness initiatives require that health plan enrollees be informed, in materials describing the initiative, about the availability of an alternative standard or goal. The regulations include model language for this purpose, but it’s vague.

The newly proposed regulations give wellness initiatives much more leeway in describing the availability of an alternative standard or goal. Now, the text of this notice may be tailored nicely to the actual nature of the program. For example, the proposed regulations offer this sample, relating to a wellness initiative aimed at obesity:

Fitness is Easy! Start Walking! Your health plan cares about your health. If you are overweight, our Start Walking program will help you lose weight and feel better. We will help you enroll. (** If your doctor says that walking isn’t right for you, that’s okay too. We will develop a wellness program that is.)

The plan may craft its notice differently, but it should be substantially as plain and unambiguous.

Next Steps…and Why Wellness Programs Matter

Federal authorities will take some time to receive and consider comments on the proposed regulations before finalizing them, but we don’t anticipate significant changes. If the regulations are not finalized in 2013, we believe non-grandfathered health plans may nevertheless increase incentives to the 30 percent level, for the plan year beginning in 2014, because that increase is authorized by the literal text of PPACA itself. Implementation of other changes described in the proposed regulations probably must wait until the regulations are finalized.

Nevertheless, the additional leverage placed in the hands of employers, to drive behavioral change, is certainly welcome. And it comes at an interesting time.

Wellness Programs and PPACA’s “Play or Pay” Mandate on Employers

A little more than a year from now, most employers will have to offer health insurance to full-time employees and dependents, or risk penalties. If the employer offers coverage, but the coverage is not adequately robust or affordable, the employer risks alternative penalties if the employee obtains federally-subsidized insurance in an insurance exchange.

It might be possible for employers to use wellness-related surcharges to deliberately make health insurance “unaffordable” to employees in poor health, thus inviting those employees to drop the employer’s coverage and obtain exchange-based coverage. That, in turn, may  trigger penalties against the employer, but the penalties will almost certainly be less–in many cases, a lot less–than the risk that employee poses to the health plan, particularly where the plan is self-insured.

Wellness Programs and PPACA’s Cadillac Tax

Five years from now PPACA’s “Cadillac tax” takes effect, imposing large excise taxes where a plan’s premium cost exceeds certain thresholds. Most plans in place today will trigger the excise tax, and it’ll be difficult to avoid it by tinkering with deductibles and other cost-sharing features. To avoid the tax, employers will need to reduce the risk in their health plans, and that means enhancing the health profile of their employees. Wellness programs are the catalysts for that enhancement, but they need time to work.

Wellness Programs and Other Federal Laws

Unfortunately, some ambiguity continues to linger at the intersection of HIPAA’s (and now PPACA’s) wellness program rules, and disability discrimination laws such as the Americans with Disabilities Act and the Genetic Health Information Act. That is, is there a point at which a wellness program permissible under HIPAA and PPACA may violate the ADA? Federal authorities who regulate the ADA have said too little on this point, but most employers who install wellness programs aren’t waiting for their permission. In any event, it’s rare for one federal law to be construed in a way that conflicts with another.

Your Lockton Account Service Team can connect you with one of Lockton’s Health Risk Solutions Directors if you’d like more information about wellness programs, and about the programs offered by many employers today.

by Ed Fensholt, J.D.
Health Reform Advisory Practice
1The proposed regulations solicit comments from employers and others, regarding whether to prorate the maximum penalty where it is based on the cost of family coverage. That is, authorities are wondering about the fairness of assessing against an employee a penalty equal to 30 percent or 50 percent of the total cost of his or her coverage tier, where just one family member fails to meet the plan’s wellness standards.
Not Legal Advice: Nothing in this Alert should be construed as legal advice. Lockton may not be considered your legal counsel and communications with Lockton’s Compliance Services group are not privileged under the attorney-client privilege.

Circular 230 Disclosure: To comply with regulations issued by the IRS concerning the provision of written advice regarding issues that concern or relate to federal tax liability, we are required to provide to you the following disclosure: Unless otherwise expressly reflected herein, any advice contained in this document (or any attachment to this document) that concerns federal tax issues is not written, offered or intended to be used, and cannot be used, by anyone for the purpose of avoiding federal tax penalties that may be imposed by the IRS.

About thebenefitblog

Eric is a Producer at Lockton Insurance Brokers, Inc., the world’s largest privately held commercial broker. Eric has over 23 years of experience in the insurance industry and has spent the last 11 years with Lockton. Eric specializes in Health & Welfare Benefits, Retirement Planning, and Executive Benefits. Eric's clients utilize his expertise in the areas of Plan Due Diligence, Transaction Structure, Fiduciary Oversight, Investment Design, Compliance and Vendor negotiation to improve the operational & financial outcome for each client. The Benefit Blog is a place to share that expertise and industry news.
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