Final Wellness Regulations Clarify Rules for Discounts Linked to Health Results

The Internal Revenue Service (IRS), the Department of Labor (DOL), and the Department of Health and Human Services (HHS), the three federal agencies with primary responsibility for implementing the Affordable Care Act (ACA), released final regulations on May 29, 2013 that expand the limits on rewards (and penalties) that certain workplace wellness programs may provide without running afoul of the nondiscrimination requirements under the Health Insurance Portability and Accountability Act (HIPAA). The new rules replace regulations from 2006 and make significant changes to the criteria that wellness plans must meet in order to reward health results without discriminating based upon a health factor. The final regulations are applicable for plan years beginning on or after January 1, 2014, and employers should review the new opportunities and requirements the final regulations provide as they consider changes to their plan designs for the upcoming open enrollment season.

Background

Since 2006, HIPAA has prohibited health plans from discriminating in eligibility, benefits, or contributions based upon an individual’s health status. Thus, employers that sponsor and administer group health plans generally may not have different eligibility criteria, or different employee contributions levels, based upon an employee’s medical condition, medical history, or any other factor linked to the employee’s health.

Since many modern wellness programs are expressly designed to encourage the adoption of healthier lifestyles by providing discounts or surcharges for health plan coverage, the HIPAA nondiscrimination rule presents an obvious obstacle. For example, a common workplace wellness plan might provide a reward for achieving certain health outcomes in the form of lower employee premiums for coverage. Under such a program, employees who are non-smokers or who can maintain their weight, blood pressure, or cholesterol below certain optimal levels would be entitled to lower costs for their coverage. Because these rewards are contingent upon an employee’s health status or attainment of a specified health outcome, they would risk violating HIPAA’s nondiscrimination provision.

In the interests of giving employers additional tools to encourage healthier lifestyles, the original 2006 regulations created an exception to HIPAA’s general nondiscrimination rule to permit employers to adopt wellness programs that promote health and prevent disease by providing premium discounts or rebates or other changes to a group health plan’s cost sharing provisions, in exchange for the employee’s participation.

Over the last decade, many federal regulatory agencies have increasingly favored workplace wellness programs and as a sign of that interest have issued a variety of regulations and other guidance paving the way for employers to continue to offer or expand wellness plans that provide premium discounts linked to health results. In 2010, Congress formally endorsed this approach in the ACA by statutorily increasing the permissible level of these rewards from the prior regulatory limit of 20 percent of the cost of coverage, to up to 30 percent for general health rewards and up to 50 percent for rewards linked to tobacco non-use. The final regulations continue this trend and further develop the range of alternatives employers have in designing and operating their wellness programs.

What’s New?

New Taxonomy for Wellness Programs

Since 2006, the HIPAA regulations have divided wellness plans into two types—those based upon participation and those based upon achieving a particular health outcome. The final regulations maintain this distinction—now known as “participatory wellness programs” and “health-contingent wellness programs”—and further subdivide health-contingent wellness programs into “activity-only” and “outcome-based” programs. Both types of health-contingent programs require individual participants to achieve a particular outcome in order to qualify for a reward or avoid a penalty. As a result, both types are subject to more extensive regulation than participatory programs. Activity-only wellness programs provide their incentives based on participation in a particular activity (such as walking, diet, or exercise in general) rather than attainment of a specified health goal. On the other hand, outcome-based wellness programs reward the individual for achieving a specific health outcome, such as not smoking or achieving a certain result on a biometric screening, such as body mass index (BMI), weight, blood pressure, blood sugar, or cholesterol.

For employers that currently maintain participatory wellness programs—those that do not require a particular outcome based on a health factor—the availability of new types of wellness programs may be of interest but will not require changes to existing programs. However, for employers that currently maintain health-contingent programs (or “standards-based” programs, to use the terminology from the 2006 regulations), the new regulations may require some changes, particularly if an existing program might not have previously been identified as “health-contingent.” In this regard, the regulatory preamble clarifies that if a measurement, test, or screening relating to a health factor is used as the initial standard for qualifying for a reward (or avoiding a penalty), the program at issue is health-contingent.

Clarification of Five Factors for Health-Contingent Programs

For participatory wellness programs, the 2006 regulations did not generally require anything more than broad availability to similarly-situated individuals, and the final regulations generally retain this approach. In contrast, both the 2006 regulations and the final regulations impose five specific requirements on outcome-based or “health-contingent” wellness programs:

• The total incentive (or penalty) available under the program cannot exceed 20 percent of the total costs of coverage under the employer’s group health plan.
• The program must be reasonably designed to promote health or prevent disease.
• Employees (and dependents, if applicable) must be given an opportunity to qualify for the incentive (or avoid the penalty) at least annually.
• All similarly-situated individuals must be given an opportunity to qualify for the incentive (or avoid the penalty) and must have access to a reasonable alternative standard if appropriate.
• All plan material describing the program must disclose that an alternative standard is available.

Amount of Reward. Regarding the amount of rewards (or penalties) available, the final regulations include two noteworthy points. First, as provided by the ACA, the final regulations indicate that wellness programs can provide rewards (or impose penalties) of up to 30 percent of the total cost of plan coverage. For programs designed to reduce or prevent tobacco usage, rewards of up to 50 percent of the total cost of plan coverage are permitted. Rewards for health-contingent programs that cover both tobacco cessation and other health issues must be coordinated to ensure that aggregate incentives or penalties do not exceed 50 percent in total. The final regulations include a number of examples intended to illustrate how these limitations apply. The regulators report having received a number of requests for further guidance regarding the allocation of rewards among family members but declined these requests and instead adopted a non-specific reasonableness standard for making such allocations; further regulatory or sub-regulatory guidance may be forthcoming in this area as circumstances warrant.

Second, the final regulations clarify the conventional wisdom that a “reward” and a “penalty” are essentially two sides of the same coin, such that a “reward” might include a discount or rebate of an employee’s premium contribution, a waiver of all or part of a cost-sharing mechanism (such as deductibles, co-payments, and co-insurance), the absence of a surcharge, or any other financial or other incentives or disincentives.

Designed to Promote Wellness. Regarding the design and general intentions behind a wellness program, the final regulations make it clear that the regulators intend for every participating individual to have an opportunity to receive the full reward available under the program regardless of his or her health status. As discussed below, this intention has a number of implications for the “alternative standard” requirement. Moreover, the regulators expressly indicate that wellness programs that consist solely of measurements, tests, or screenings relating to health factors will not be viewed as being reasonably designed to promote health and prevent disease. In the regulators’ view, “promotion of health and prevention of disease” encompasses both measurement and remediation. The final regulations clarify that a wellness program satisfies the “reasonably designed” requirement if it has a reasonable chance of improving health or preventing disease and is not overly burdensome, is not a subterfuge for discrimination based on health factors, and does not use a highly suspect method for promoting health or preventing disease. This determination is made based on the relevant facts and circumstances, but the regulatory preamble does note by way of example that required nightly attendance at a one-hour class would not be reasonable.

Reasonable Alternative Standards. As noted above, health-contingent wellness programs must make a “reasonable alternative standard” available to individuals for whom satisfaction of the regular criteria would be medically (or otherwise) inadvisable. For activity-only programs, an alternative standard must be provided for any individual for whom, for that period (e.g., a particular plan year), it is either unreasonably difficult due to a medical condition to meet the otherwise applicable standard, or for whom it is medically inadvisable to attempt to satisfy the otherwise applicable standard. In contrast, for outcome-based programs, an alternative standard must be provided to all individuals who do not meet the initial standard, regardless of the reason.

For either type of program, employers are not obliged to create alternative standards unless and until an individual makes a request for one, and employers are permitted to either use a uniform alternative standard for all program participants or tailor alternative standards to each individual’s circumstances. An individual who seeks an alternative standard under an activity-based program may be required to provide verification from his or her medical provider, but employers may not seek such verification from individuals requesting alternative standards under an outcome-based program.

The final regulations also provide criteria for evaluating whether a particular alternative standard is “reasonable”:

1. If the standard involves an educational program, the plan must make the program available or assist the employee in finding such a program and pay its cost.
2. The time commitment required must be reasonable (e.g., requiring attendance nightly at a one-hour class would be unreasonable).
3. If the standard involves a diet program, the wellness program is not required to cover the costs of food but must pay any membership or participation fee.
4. If the individual’s personal physician advises that the “regular” standard is not medically appropriate for that individual, the wellness program must make a separate standard available that is consistent with the individual’s personal physician recommendations (and the related group health plan may impose standard cost sharing or coverage for medical items or services furnished pursuant to the physician’s recommendations).

The regulators indicate that although health-contingent programs are not required to be based on evidence-based clinical standards or be accredited, use of such standards for designing wellness standards will be viewed as a “best practice.”

Are We Done Yet? Just when you thought you had satisfied the rules, wait . . . the final regulations indicate that health-contingent programs must also provide alternative standards for their alternative standards. For example, if a wellness program provides a walking program as an alternative standard to a running program, individuals for whom it is unreasonably difficult due to a medical condition to complete the walking program (or for whom it is medically inadvisable to complete the walking program) must be provided with an alternative alternative standard under which they can qualify for the reward. Similarly, for outcome-based programs with outcome-based alternative standards, the final regulations clarify that such standards must themselves comply with the requirements for outcome-based programs. For employers reluctant to take a trip down this particular rabbit hole, the final regulations do indicate that in lieu of providing an alternative standard, a health-contingent program may always waive the otherwise applicable standard and provide the reward.

Expansion of Notice Requirement and Revised Sample Notice Language Available

As explained above, the final regulations continue to require the wellness program to disclose the availability of a reasonable alternative standard that will allow the individual to qualify for the reward. This disclosure must be included in all plan materials that describe the terms of the wellness program. This notice is required, regardless of whether the reward is based upon completing an activity or another health outcome, and must include any information necessary to access the alternative, along with a statement that the plan will accommodate the recommendation of the individual’s personal physician. If the reward is an outcome-based reward, the notice must also be included in any communication informing the individual that he or she did not satisfy the initial outcome-based standard.

The new guidance clarifies that plan communications that merely mention the wellness program but do not describe the terms of the program, such as the Summary of Benefits of Coverage (SBC), need not include the wellness notice disclosure. However, any communication that describes the premium savings available to individuals who are not smokers or who meet any other health factor must include the disclosure. The final regulations include the following sample language:

Your health plan is committed to helping you achieve your best health. Rewards for participating in a wellness program are available to all employees. If you think you might be unable to meet a standard for a reward under this wellness program, you might qualify for an opportunity to earn the same reward by different means. Contact us at [insert contact information] and we will work with you (and, if you wish, with your doctor) to find a wellness program with the same reward that is right for you in light of your health status.

Rewards Related to Non-Tobacco Use

As noted above, the final regulations permit wellness programs to provide larger rewards (or penalties) to prevent or reduce tobacco use by participating individuals than apply for other wellness initiatives. The increased limit for rewards offers employers a substantial amount of flexibility to target (and hopefully reduce) tobacco use among their employee population. Beyond highlighting the potential need for multiple alternative standards to cope with the “cycle of failure and repeated effort” typical of tobacco cessation programs, the regulatory preamble includes an interesting discussion of the intersection between the ACA’s general prohibition on rescissions of coverage triggered by a “material” misstatement of fact and inaccurate information provided by employees.

Wellness programs that include a reward or penalty associated with tobacco use typically seek annual affirmation from participation individuals about their use (or non-use) of tobacco products. Given the potentially large rewards or penalties that individuals may now face, “stealth” tobacco users may begin to consider their responses more carefully, potentially raising difficult questions for employers that are faced with employee misrepresentations. The regulatory preamble notes that in the individual and small group insurance markets, the availability of a “recoupment” remedy (i.e., the carrier is able to recover non-use surcharge or premium discount from an individual who misrepresents his or her tobacco use status) effectively causes misrepresentations about tobacco use to be non-“material,” meaning coverage cannot be rescinded on that basis. Although larger group and self-funded plans are not subject to these rules at the moment, the regulatory preamble provides some insight into the regulators’ view of this issue. For such plans, the recoupment remedy would largely be driven by the plan terms, and employers in these markets may wish to consider preemptive plan amendments to reserve the right to seek recoupment where an employee (or family member) secures a wellness reward (or avoids a penalty) by misrepresenting his or her tobacco use status.

One and Done?

Employers will be well-advised to remember that the final regulations only address the new rules under the ACA, which in turn only revised the criteria for compliance with the 2006 HIPAA nondiscrimination requirements for wellness plans. The regulators emphasize that the final regulations do not impact or change existing requirements under the HIPAA privacy and security rules for group health plans that hold protected health information as part of a wellness program that is itself a group health plan covered by the Employee Retirement Income Security Act (ERISA). Like all ERISA group health plans, these wellness plans continue to be subject to ERISA, the Consolidated Omnibus Budget Reconciliation Act (COBRA), the Genetic Information Nondiscrimination Act (GINA), and a variety of other federal and state laws regulating the provision of employee health benefits. Moreover, the final regulations do not affect other workplace wellness programs that are not group health plans (i.e., workplace wellness programs not linked in any way to an employee health plan but established by employers and implemented in the workplace). The IRS recently reminded taxpayers that these rules also did not change or even address the tax implications of many workplace wellness benefits.

It should be noted, however, the IRS recently issued proposed rules addressing whether employers may take into account wellness plan premium discounts when determining affordability and minimum value under the ACA for the employer mandate “shared responsibility” rules. Premium discounts for non-tobacco users will count in the employer’s favor for the affordability and minimum value analysis, but other discounts will only be taken into account for a 2014 transition year for plans in place when the proposed rules were issued. As a result, affordability and minimum value generally will be determined without regard to premium discounts related to wellness programs, other than those linked to tobacco use. These issues were not revisited in this final rule.

One of These Things is Not Like the Others

As noted above, the final wellness regulations were issued jointly by the IRS, DOL, and HHS. These three are not the only federal regulators with an interest in workplace wellness programs. The fourth regulator—the Equal Opportunity Employment Commission (EEOC)—has not been quite as receptive to these programs. Of particular concern, the EEOC has not confirmed that incentive-based wellness programs will comply with the Americans with Disabilities Act (ADA) if they also conform to the HIPAA standards outlined in the final regulations. Ordinarily, a wellness program that requires medical examinations or asks disability-related questions would give rise to a violation of the ADA. Guidance issued by the EEOC has provided that for a wellness program to be permissible under the ADA (and GINA) it must be “voluntary.” To be voluntary, an employer may not require participation nor penalize employees who do not participate. This approach poses an obvious concern for health-contingent wellness programs.

Although the EEOC has not actively pursued health-contingent wellness programs to date (and has lost a handful of challenges to programs of this type in the federal courts), it has yet to provide any specific guidance about what level of incentive may be provided as a condition of participation in a wellness program before the program is rendered involuntary. On May 8, 2013, the EEOC heard testimony in a public meeting from a panel of witnesses representing business and employee advocates regarding the importance of developing guidance under the various federal statutes that are implicated by wellness programs. Although the EEOC did not commit to any course of action following the hearing, several of the Commissioners agreed that it would be beneficial for the EEOC to provide additional guidance concerning the status of wellness programs under the federal laws it administers. The Commissioners did emphasize that the federal agency is at the beginning of its consideration of workplace wellness programs, suggesting that it may be some time before more certain guidance is forthcoming. Employers should remain alert to developments from the EEOC in this area.

What’s an Employer to Do?

The final HIPAA wellness regulations become effective on the first day of the 2014 plan year—January 1, 2014 for plans operating on a calendar year basis. Prior to this effective date, employers have a number of action items to consider, including the following:

1. Review your existing wellness program, particularly if it is a health-contingent wellness program to confirm that it is still nondiscriminatory under the revised five-factor test described in the final regulations.
2. Determine whether your wellness program is an activity-only program or an outcome-based program and confirm whether the alternative method of achieving the reward meets the new criteria for that type of program.
3. Review your reward level and consider whether to increase it to take into account the new higher limits, particularly for tobacco usage. Be careful though: if your plan is grandfathered under the ACA, don’t forget to take into account whether increasing the wellness reward (or penalty) may cause a loss of the plan’s grandfathered status.
4. Review all plan communications that describe the wellness program and update them to comply with the new expanded notice requirements.

With one notable exception for the EEOC, the federal regulators and Congress generally support the development of workplace wellness programs and have offered some interesting opportunities for expanding and improving these programs under the final regulations. Employers should familiarize themselves with the final regulations and explore the options available to them beginning in 2014 to encourage their employees to adopt and maintain healthier lifestyles.