Health Care Reform and Wellness Programs: Protecting Participants and Giving Employers more Flexibility
On November 20, 2012, the Departments of Treasury, Labor and Health and Human Services, released proposed regulations on incentives for nondiscriminatory wellness programs in group health plans as provided for under the Patient Protection and Affordable Care Act of 2010 (“PPACA”). These proposed regulations would apply to both grandfathered and non-grandfathered group health plans for plan years beginning on or after January 1, 2014. PPACA codified the 2006 final wellness program regulations under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). See our January 2007 issue for a summary of those final regulations). HIPAA generally prohibits group health plans (and health insurance issuers) from discriminating against participants in eligibility, benefits or premiums based on a health factor. PPACA also increased the maximum reward that could be provided under a “health-contingent” wellness program from 20% to 30% of the total cost of coverage under the plan. PPACA also provided for the possibility that the 30% maximum could be further increased to 50%.
The 2006 final regulations classified wellness programs as:
- those that either do not require a participant to meet a standard related to a health factor to obtain a reward or that provide no reward; and
- those that require a participant to satisfy a standard related to a health factor in order to obtain a reward.
Under the proposed regulations wellness programs are now referred to by the following two categories:
“participatory” and “health-contingent.” The proposed regulations generally leave unchanged the rules for administering participatory programs but change and clarify the rules for administering health-contingent wellness programs.
Participatory Wellness Programs
A participatory wellness program does not condition eligibility for a reward upon a participant’s ability to meet a health standard. This type of wellness program satisfies the HIPAA non-discrimination rules if participation in the program is available to all similarly situated individuals. For example, HIPAA allows employers to treat employees as a distinct group that is separate from dependents. Accordingly, a reward under any wellness program could be offered to a group of employees and not to spouses or dependent children.
Examples of participatory programs include:
- Incentives to participate in a health fair or testing (regardless of outcome)
- Waiver of copayment/deductible for well-baby visits
- Reimbursement of health club memberships
- Reimbursements for smoking-cessation programs (regardless of outcome)
- A program that rewards employees for attending a monthly health education seminar
HIPAA does not impose any limits on the size of the rewards offered through a participatory wellness program. However, employers should be aware that certain types of rewards may be taxable income to participants. For example, reimbursement of all or part of the cost for a health club membership is generally taxable income to the recipient. In addition, cash or cash equivalent rewards (such as gift cards or gift certificates) are always taxable income for federal income tax purposes. However, low-value, non-cash rewards are excluded from taxable income if such rewards can be reasonably considered as de minimis fringe benefits.
Health-Contingent Wellness Programs
A health-contingent wellness program requires an individual to satisfy a standard related to a health factor in order to receive a reward. Examples of a health-contingent wellness program include, but are not limited to:
- a program that imposes a premium surcharge based on tobacco use; and
- a program that rewards a cholesterol level under 200 or provides the same reward if an employee with a higher cholesterol level takes additional steps (such as meeting with a health coach, taking a health or fitness course, or complying with a physician’s plan of care).
To be nondiscriminatory under HIPAA, a health-contingent wellness program must meet all five requirements described below.
1. Size of Reward
The total reward must not exceed 30% of the cost of coverage under the related group health plan (up from the prior 20% maximum). If the wellness program is designed to prevent or reduce tobacco use, then the total reward must not exceed 50% of the cost of coverage.
If the reward is available to employees only, then the reward cannot exceed 30% (or 50% if the program is designed to prevent or reduce tobacco use) of the total cost of employee-only coverage under the plan. If the reward is also available to any class of dependents (such as spouses or spouses and dependent children), then the reward must not exceed the applicable percentage (i.e., 30% or 50%) of the total cost of coverage in which an employee and any dependents are enrolled. Cost of coverage includes both employer and employee contributions.
For example, assume that an employer sponsors a group health plan with the following conditions:
- The annual premium for employee-only coverage is $6,000 (of which the employer pays $4,500 per year and the employee pays $1,500 per year).
- The plan offers a health-contingent wellness program focused on exercise, blood sugar, weight, cholesterol, and blood pressure.
- The reward for compliance with the above program is an annual premium rebate of $600.
- In addition, as part of the health-contingent wellness program, the plan imposes an additional $2,000 tobacco premium surcharge on employees who have used tobacco in the last 12 months and who are not enrolled in the plan’s tobacco cessation program (those who participate in the plan’s tobacco cessation program are not assessed the $2,000 surcharge).
In this example, the health-contingent program satisfies the requirements of the proposed regulations because:
- the total of all rewards (including absence of a surcharge for participating in the tobacco program) is $2,600 ($600 + $2,000 = $2,600), which does not exceed 50% of the total annual cost of employee-only coverage ($3,000); and
- tested separately, the $600 reward for the wellness program unrelated to tobacco use does not exceed 30% of the total annual cost of employee-only coverage, $1,800.
2. Reasonable Design
The program must be reasonably designed to promote health or prevent disease. A program meets this standard if:
- it has a reasonable chance of improving the health of, or preventing disease in, participating individuals;
- it is not overly burdensome;
- it is not a subterfuge for discriminating based on a health factor; and
- it is not highly suspect in the method chosen to promote health or prevent disease.
The proposed regulations further explain that the determination of whether a program meets the “reasonable design” standard is based on all the relevant facts and circumstances.
The proposed regulations also provide that to the extent a plan’s initial standard for obtaining a reward is based on the results of a measurement, test, or screening relating to a health factor (e.g., a biometric examination or health risk assessment), the plan must make available to any individual who does not meet the initial standard a different, reasonable means of qualifying for the reward. This appears to be a significant change from the 2006 final regulations because it would require an alternative standard to be provided to any individual who does not meet the initial standard, not just those who have a medical condition which makes it unreasonably difficult or medically inadvisable for them to comply with the initial standard.
3. Uniform Availability & Reasonable Alternative Standards
The rewards must be offered to all similarly situated employees. The example for grouping individuals as described above under participatory wellness programs (e.g., employees, dependents) also applies here. In addition, a health-contingent wellness program must allow a reasonable alternative standard (or waiver of the standard) to obtain the reward for individuals for whom:
- it is unreasonably difficult to meet the standard because of a medical condition; or
- it is medically inadvisable to attempt to satisfy the standard.
The proposed regulations provide the additional guidance on furnishing a reasonable alternative standard:
- A plan is not required to determine a particular alternative standard before an individual requests one. But, once a qualifying individual requests an alternative standard, the plan must furnish a reasonable alternative standard to that individual or waive the condition for that individual to obtain the reward.
- If the reasonable alternative standard is completion of an educational program (e.g., a class on asthma treatment and self-care), the plan must make the educational program available (as opposed to requiring the individual to find such a program unassisted), and must pay for the cost of the program.
- If the reasonable alternative standard is a diet program, the plan is not required to pay for the food, but must pay any membership or participation fee.
- If the reasonable alternative standard is following the recommendations of a medical professional who is an employee or agent of the plan, and an individual’s personal physician states that the plan’s recommendations are not medically appropriate for that individual, the plan must provide a reasonable alternative standard that accommodates the recommendations of the individual’s personal physician with regard to medical appropriateness. Plans may impose standard cost sharing under the plan or coverage for medical items and services furnished pursuant to the physician’s recommendations.
The 2006 final regulations permitted a plan to seek verification of an individual’s need for an alternative standard, for example, by requiring a statement from that individual’s personal physician. The proposed regulations amend that rule to provide that physician verification may be required by a plan if reasonable under the circumstances. As an example, the proposed regulations state that it would not be reasonable for a plan to seek verification of a claim that is obviously valid based on the nature of the individual’s medical condition that is known to the plan.
4. Notice of Availability of Alternative Standards
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; or
- the possibility of waiver of the standard.
If plan materials merely mention that a program is available, without describing its terms, this disclosure is not required.
The proposed regulations provide new model disclosure language that may be used: Your health plan is committed to helping you achieve your best health status. 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 to find a wellness program with the same reward that is right for you in light of your health status.
Other model disclosure language appears in the examples to the proposed regulations.
5. Frequency of Opportunity to Qualify
All individuals who are eligible for the wellness program must be provided an opportunity to qualify for the program’s reward at least once per year.
Employers should review their wellness programs to determine whether they comply with these proposed regulations. Employers should also stay tuned for the final regulations. There are many other significant PPACA requirements that require further implementing guidance as we near 2014. We will continue to keep you updated on new guidance as it is issued.