The Departments of Treasury, Labor, and Health and Human Services (“Departments”) issued final nondiscrimination regulations (the “regulations”) under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) on December 13, 2006. These regulations finalize the 2001 interim rules on the group health plan nondiscrimination provisions and the proposed regulations on wellness programs. The regulations apply for plan years beginning on or after July 1, 2007. Thus, calendar year plans must comply beginning January 1, 2008.
HIPAA’s nondiscrimination provisions generally prohibit group health plans and group health insurance issuers from discriminating against individuals on the basis of health factors, either with respect to eligibility or in determining premium contributions. Although a group health plan or group health insurance issuer is not required to provide coverage for any group, once benefits are provided they must be uniformly available to all similarly situated individuals. Any restriction on benefits must also be uniformly applied and must not be directed at individual participants or beneficiaries based on a health factor. This includes annual or lifetime limits on benefits, exclusions for a specific disease or condition, exclusions for certain types of treatments or drugs, or denial of benefits based on a determination that the benefits are experimental or not medically necessary.
The regulations define as “health factors” eight health-status related factors that may not be used to discriminate in health coverage among individuals. These are:
- Health status
- Medical condition (including both physical and mental illnesses)
- Claims experience
- Receipt of health care
- Medical history
- Genetic information
- Evidence of insurability (including conditions arising out of acts of domestic violence and participation in activities such as motorcycling, all terrain vehicle riding, snowmobiling, horseback riding, and other similar activities)
Applying different eligibility rules, providing different benefits, terminating coverage or charging different premiums to individuals based on one or more of these health factors constitutes impermissible discrimination.
Discrimination in Premiums or Contributions
Group health plans and group health insurance issuers may not require individuals to pay higher premiums or contributions than those of similarly situated individuals based on any health factor that relates to the individual or his or her dependent. For determining an individual’s premium or contribution rate, discounts, rebates, payments in kind and any other premium differential mechanisms are taken into account. (Certain wellness programs, however, can impose different premiums or contributions, as discussed below.) While a group health plan or group health insurance issuer cannot charge an employer or an individual a higher rate for that individual’s coverage than the group rate based on a health factor, charging a group rate based on health factors is permissible. For example, an insurance carrier is permitted to take into consideration the claims experience of individuals covered under the plan in determining the employer’s premium rate. However, the issuer must blend the rate so that neither the employer nor any individual is charged a higher rate for that individual’s coverage than other similarly situated individuals.
Similarly Situated Individuals
The regulations permit different treatment of two or more groups of similarly situated individuals if the distinction is based on a “bona fide employment-based classification consistent with the employer’s usual business practice,” as determined by relevant facts and circumstances. Bona fide classifications can include full-time versus part-time status, geographic location, membership in a collective bargaining unit, date of hire, length of service, current employee versus former employee status, and different occupations.
Beneficiaries may also be treated as two or more distinct groups of similarly situated individuals if the distinction is based on the participant’s bona fide employment-based classification, relationship to the participant, marital status, a child’s age or student status, or any other factor that is not a health factor.
Nonconfinement clauses (plan provisions that deny benefits based on the individual’s confinement to a hospital or other health care institution at the time coverage would otherwise become effective) are prohibited under the HIPAA nondiscrimination regulations. However, many states require health insurance issuers to continue providing benefits to hospitalized individuals beyond the date their insurance coverage ends, which conflicts with HIPAA’s rule that the succeeding issuer must begin covering the hospitalized individual. The final regulations clarify that state law cannot change the succeeding issuer’s obligations under HIPAA, and that when both prior and succeeding issuers are obligated to provide benefits, the state’s coordination of benefits laws apply.
A plan cannot require an employee to be “actively at work” to begin health coverage, unless absence from work due to any health factor (such as sick leave) is treated as being actively at work. For example, if a group health plan provides that an employee becomes eligible to enroll 30 days after the first day of employment, and the employee is not actively at work because of illness on the first day after the end of the 30-day period, then delaying eligibility for enrollment until the first day the employee is actively at work would violate the HIPAA nondiscrimination provisions. However, a plan may establish a rule stating that coverage for new employees becomes effective on the first day the employee reports to work, provided that the rule applies regardless of the reason for the absence. Thus, if an employee is scheduled to report to work on August 3, but is unable to work on that day because of illness and begins work on August 4, the group health plan does not violate the HIPAA nondiscrimination provisions by making the employee’s coverage effective on August 4.
Source of Injury Exclusions
Source-of-injury exclusions deny benefits when an injury arises from a specified cause or activity. Under the final regulations, if a plan or issuer provides benefits for a type of injury, it may not deny benefits for treatment of an injury if the injury results from a medical condition or an act of domestic violence. This rule applies even when the medical condition was not diagnosed before the injury. The following examples from the final regulations illustrate this rule:
- A group health plan that provides benefits for head injuries but has an exclusion for injuries sustained while bungee jumping does not violate the nondiscrimination regulations, because the injury did not result from a medical condition or an act of domestic violence.
- A group health plan that provides benefits for medically necessary hospital stays but excludes benefits for self-inflicted injuries or injuries sustained during an attempted suicide as a result of depression is an impermissible source-of-injury exclusion because it excludes benefits for treatment of an injury resulting from depression, which is a medical condition. The final regulations clarify that, even if the individual had not been diagnosed with depression before injuries were sustained, the injuries must be covered.
Preexisting Condition Exclusions
A preexisting condition exclusion is a limitation or exclusion of benefits based on the fact that a condition was present before the effective date of coverage under a group health plan. HIPAA generally imposes limits on the length of preexisting condition exclusions. Under the HIPAA nondiscrimination provisions, plans are permitted to impose preexisting condition exclusions only if the exclusions:
- comply with the HIPAA requirements for crediting previous coverage;
- apply uniformly to all similarly situated individuals; and
- are not based on a health factor.
A wellness program is “any program designed to promote health or prevent disease.” The requirements for wellness programs under the final regulations vary depending upon whether the program requires an individual to meet a health factor or provides a reward.
Wellness Programs That Do Not Require an Individual to Meet a Health Factor to Receive a Reward
If the wellness program does not require an individual to meet a health factor or does not provide a reward, the program is consistent with HIPAA’s nondiscrimination requirements. The following programs are permissible under the HIPAA nondiscrimination requirements so long as all similarly situated individuals are eligible to participate:
- A program that reimburses all or part of the cost of memberships at a fitness center.
- A diagnostic testing program that provides a reward for participation and does not base any part of the reward on outcomes.
- A program that encourages preventive care through the waiver of the copayment or deductible requirement under a group health plan for the costs of, for example, prenatal care or well-baby visits.
- A program that reimburses employees for the costs of smoking cessation programs without regard to whether the employee quits smoking.
- A program that provides a reward to employees for attending a monthly health education seminar.
Wellness Programs That Require an Individual to Meet a Health Factor to Receive a Reward
If the wellness program requires an individual to satisfy a standard related to a health factor then, in order to comply with the HIPAA nondiscrimination regulations, the following five requirements must be satisfied.
- The reward for the wellness program, coupled with the reward for other wellness programs that require satisfaction of a standard related to a health factor, must not exceed 20 percent of the cost of employee-only coverage under the plan. If dependents can also participate in the wellness program, then the reward must not exceed 20 percent of the cost of the coverage in which an employee and any dependents are enrolled. For purposes of this provision, the cost of coverage includes both employer and employee contributions.
- The program must be reasonably designed to promote health or prevent disease. The program meets this standard if it has a reasonable chance of improving the health of or preventing disease in participating individuals and it is not overly burdensome, is not a subterfuge for discriminating based on a health factor, and the method chosen to promote health or prevent disease is not highly suspect.
- All individuals who are eligible for the program must be provided an opportunity to qualify for the program’s reward at least once per year.
- The reward under the program must be available to all similarly situated individuals. For those who have a health factor that makes it unreasonably difficult or medically inadvisable to satisfy or attempt to satisfy the otherwise applicable standard, a waiver or reasonable alternative standard for obtaining the reward must be available.
- The plan must disclose in all plan materials describing the terms of the program the availability of the reasonable alternative standard for obtaining the reward. If plan materials merely mention that a program is available, without describing its terms, disclosing the reasonable alternative standard is not required.
Smoker Surcharges and Non-Smoker Discounts
The HIPAA nondiscrimination regulations generally prohibit a group health plan or health insurance issuer from charging different premiums or contributions to similarly situated individuals based on a health factor. However, a group health plan or health insurance issuer may offer premium discounts or rebates if such reward is based on participation in a program of health promotion or disease prevention (i.e., a “wellness program” as discussed above). Many group health plans have instituted premium surcharges for smokers or provide a reduction of premiums (a discount) for non-smokers. Under the final regulations, such surcharges for smokers or discounts for non-smokers would constitute wellness programs that require an individual to satisfy a standard related to a health factor. For such programs to be permissible under the HIPAA nondiscrimination regulations, the surcharges or discounts must meet all of the above requirements. The preamble to the final regulations discusses nicotine addiction and states that, for individuals for whom it is it unreasonably difficult to quit smoking due to addiction, a reasonable alternative standard for obtaining the reward must be offered. The preamble goes on to state that a plan or issuer might offer different smoking cessation classes each year or might switch the alternative to providing nicotine replacement therapy. The final regulations also contain an example of a reasonable alternative standard of viewing a 12-hour video series on health problems associated with tobacco use over a 12-month period. The final regulations clarify that plans may require verification, including a statement from a physician, that a health factor makes it unreasonably difficult or medically inadvisable for an individual to meet a wellness program standard.
Favorable Treatment of Individuals with Adverse Health Factors
Group health plans are permitted to establish more favorable eligibility rules for individuals with adverse health factors, such as a disability. For example, a plan that generally provides coverage for dependent children to age 23 but permits disabled dependent children to continue coverage beyond age 23 does not violate the HIPAA nondiscrimination provisions. A plan may also permit disabled former employees to continue coverage for a specified period of time after coverage would otherwise end due to termination of employment. Additionally, a plan can charge an individual with an adverse health factor less if the lower charge is based on the adverse health factor.
Application to Health Reimbursement Arrangements
The final regulations provide clarification that health reimbursement arrangements (“HRAs”) that permit participants to carry forward balances into later years do not violate the HIPAA nondiscrimination provisions. The preamble states the Departments received many inquiries about whether an HRA would violate the HIPAA nondiscrimination requirements, because an HRA could favor participants with less claims experience, which is an impermissible health factor. In response, the final regulations contain an example that provides that the carryforward of unused HRA reimbursements to later years would not violate the HIPAA nondiscrimination requirements, even though the reimbursement amount available for the year will vary among employees within the same group of similarly situated individuals based on prior claims experience. In the example, an employer sponsors an HRA under which medical expenses are reimbursed up to an annual maximum amount. The maximum reimbursement amount is $1,500 multiplied by the number of years the employee has participated in the HRA, reduced by the total reimbursements received for prior years. The conclusion provides that because employees who have participated in the HRA for the same length of time are eligible for the same total benefit over that length of time, the arrangement does not violate the HIPAA nondiscrimination requirements.
Exemption for Nonfederal Governmental Plans
Sponsors of self-funded nonfederal governmental plans may elect to exempt their plans from the HIPAA nondiscrimination requirements. If the plan sponsor subsequently chooses to comply with the HIPAA nondiscrimination requirements, the plan must notify individuals who were denied enrollment based on a health factor and give those individuals at least 30 days to enroll in the plan. The plan may not treat the individual as a late or special enrollee. The plan must permit coverage to be effective as of the first day the plan’s exemption was no longer in effect.
Effect on Other Laws
The final regulations state that compliance with HIPAA’s nondiscrimination requirements is not determinative of compliance with any other provision of ERISA or any other state or federal law, including the Americans with Disabilities Act (“ADA”), Title VII of the Civil Rights Act of 1964, the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”), or the Family and Medical Leave Act of 1993. The regulations caution that HIPAA nondiscrimination provisions may permit certain practices that other state or federal laws prohibit. For example, under the HIPAA nondiscrimination regulations, plans can exclude or limit benefits for certain conditions or treatments. However, if a plan instituted a limit on benefits for treatment of AIDS, that limit would constitute disability-based discrimination in violation of the ADA. In addition, if a plan provides coverage for preventive treatments, but excludes coverage for prescription contraceptives, the plan may be in compliance with the HIPAA nondiscrimination provisions, but the exclusion of prescription contraceptives would violate Title VII, because prescription contraceptives are used exclusively by women. The Departments advise employers, plans, health insurance issuers and other service providers to consider the applicability of these other laws to their coverage.