Summary: A proposed regulation published in the November 26, 2012 Federal Register will significantly increase the rewards (and penalties) permitted in connection with "health contingent" wellness programs in employer group health plans. The maximum rewards (or penalties) may total up to 30% of the total cost (including both employer and employee contributions) of coverage (up from 20% under current law) and may reach up to 50% for wellness programs designed to prevent or reduce tobacco use. Public comments on the proposed rule are due by January 25, 2013. Group health plans will still be required to comply with the Americans with Disabilities Act and the Genetic Information Nondiscrimination Act, which can require separate legal analysis of wellness reward structures.

Affected Plans: The proposed rule applies to employer group health plans and to health insurance issuers offering group health insurance coverage. The new proposed regulation implements parallel provisions of ERISA, the Internal Revenue Code (IRC) and the Public Health Service Act; consequently, it applies to private-sector employers and governmental employer plans, and to plans offered by for-profit and nonprofit employers and church plans, whether insured or self-insured. In addition, the new wellness rule will apply to both grandfathered plans and non-grandfathered plans. The Patient Protection and Affordable Care Act (PPACA) modified the so-called HIPAA health status nondiscrimination rules regarding wellness programs beginning in 2014, and this proposed regulation implements those PPACA changes.

Timing: These new increased wellness rewards (and penalties) are authorized for plan years beginning on and after January 1, 2014. Current rules that limit wellness rewards (and penalties) to 20% of total plan costs for employee-only coverage (or employee-plus-dependent coverage if dependents can participate in the wellness program) will still apply to the 2012 and 2013 plan years. The Department of Labor had previously indicated its intent to adopt and implement the PPACA's increased wellness reward limit prior to 2014, but has decided not to do so in the new proposed rule.

Key Implications: The proposed rule implements provisions of the PPACA enacted in 2010 that will significantly expand employers' and insurers' ability to financially incent employees and dependents to maintain, or to pursue changes in, their health status and health-related behaviors, through plan designs and interventions that are part of a nondiscriminatory wellness program. The new rule provides additional tools that may assist employer plan sponsors and insurers in managing employee health and plan costs. The proposed rule also clarifies and amends certain aspects of other requirements for maintaining a legally compliant health-contingent wellness program (e.g., the "reasonable alternative standard" that must be offered in certain cases). Similarly, the proposed rule provides new sample language that can be used to satisfy the requirement that the availability of alternative means to qualify for the incentive reward must be disclosed in all plan materials describing the terms of a health-contingent wellness program.

General Discussion and Observations: For plan years beginning on and after January 1, 2014, employers will have expanded authority to offer rewards (or penalties) for participation in wellness programs in a group health plan. Specifically, rewards (or penalties) may have a value of up to 30% (50% for programs to prevent or reduce tobacco use) of the gross cost of coverage, as explained further below. The authority applies to insured or self-insured, and both non-grandfathered and grandfathered group health plans.

The Departments of Treasury, Labor, and Health and Human Services (HHS) ("the regulators") have proposed a new regulation that revises and restates the five categories of requirements, as described under the current HIPAA health status nondiscrimination rules, that must be satisfied in order for a group health plan or an issuer (i.e., an insurer) to offer these enhanced rewards.

Consistent with current rules, the proposed regulation divides wellness programs into two categories:

  • Participatory wellness programs
  • Health-contingent wellness programs

Participatory wellness programs are made available to all similarly situated individuals and either do not provide a reward or do not include any conditions for obtaining a reward that are based on an individual satisfying a standard that is related to a health factor.

For purposes of the new regulation, and consistent with current rules, references to an individual obtaining a reward include both obtaining a reward (such as a premium discount or rebate, a waiver of all or part of a cost-sharing mechanism, an additional benefit, or any financial or other incentive) and avoiding a penalty (such as the absence of a premium surcharge, or other financial or nonfinancial disincentive). Likewise, references to a plan providing a reward include both providing a reward (such as a premium discount or rebate, a waiver of all or part of a cost-sharing mechanism, an additional benefit, or any financial or other incentive) and imposing a penalty (such as a surcharge, or other financial or nonfinancial disincentive). These references to the types of permissible rewards apply to both participatory wellness programs and health-contingent wellness programs.

Examples of participatory wellness programs include:

  • A program that reimburses all or part of the cost of membership in 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 participating, or that otherwise provides a reward for participating, in a smoking-cessation program, without regard to whether the employee quits smoking
  • A program that provides a reward to employees for attending a monthly no-cost health education seminar
  • A program that provides a reward to employees who complete a health risk assessment regarding current health status, without any further action (educational or otherwise) required by the employee with regard to the health issues identified as part of the assessment

Thus, participatory wellness programs encompass those programs that do not provide a reward or condition the reward on satisfying a standard that is related to a health factor. For example, receiving a reward simply by completing a health risk assessment regardless of the health status reflected in the assessment does not condition the reward on satisfying a health factor, such as target BMI range. These participatory wellness programs are not required to meet the five enumerated requirements applicable to health-contingent wellness programs, but they are required to be made available to all similarly situated individuals.

Health-contingent wellness programs, on the other hand, require an individual to satisfy a standard related to a health factor in order to obtain a reward. Or they might require an individual to do more than a similarly situated individual based on a health factor in order to obtain the same reward. On its face, this represents discrimination among plan participants based on their health status, which is generally prohibited under HIPAA and the PPACA (as incorporated into ERISA, the IRC and the Public Health Service Act). For group health plans that comply with the exception for health-contingent wellness programs, however, the new proposed rule continues to permit such rewards, similar to the permissibility of such wellness program rewards under current law.

Examples of health-contingent wellness programs include:

  • A program that imposes a premium surcharge based on tobacco use
  • A program that uses a biometric screening or a health risk assessment to identify employees with specified medical conditions or risk factors (such as high cholesterol, high blood pressure, abnormal body mass index or high glucose level) and provides a reward to employees identified as within a normal or healthy range (or at low risk for certain medical conditions), while requiring employees who are identified as outside the normal or healthy range (or at risk) to take additional steps (such as meeting with a health coach, taking a health or fitness course, adhering to a health improvement action plan or complying with a health care provider's plan of care) to obtain the same reward

As under current rules, health-contingent wellness programs will be permitted in a group health plan only if they satisfy five special conditions as restated and clarified in the new proposed rule. The five special conditions involve:

  • Frequency of opportunity to qualify
  • Size of reward
  • Uniform availability and reasonable alternative standards
  • Reasonable design
  • Notice of other means of qualifying for the reward

These five conditions will generally be familiar from the current HIPAA health status nondiscrimination regulation, but some of the five conditions have been modified in the new proposed regulation in several important ways. The five conditions apply only to wellness programs that are health-contingent programs (i.e., wellness programs that both provide a reward and condition the reward on satisfying a standard that is related to a health factor).

Five Special Conditions for Health-Contingent Wellness Programs

Frequency of opportunity to qualify. The proposed rule requires health-contingent wellness programs to give individuals eligible for the program the opportunity to qualify for the reward at least once per year. The once-per-year requirement is a bright-line standard for determining the minimum frequency that is consistent with a reasonable design for promoting good health or preventing disease, and is consistent with current rules.

Size of reward. The proposed rule continues to limit the total amount of the reward for health-contingent wellness programs, whether offered alone or coupled with the reward for other health-contingent wellness programs. The total reward offered to an individual under an employer's health-contingent wellness programs could not exceed a specified percentage (referred to as the "applicable percentage" of the total cost of employee-only coverage under the plan), taking into account both employer and employee contributions toward the cost of coverage.

If, in addition to employees, any class of dependents, such as spouses and/or dependent children, may participate in the health-contingent wellness program, the reward may not exceed the applicable percentage of the total cost of the coverage in which the employee and any dependents are enrolled (such as family coverage or employee-plus-one coverage). Regulations contemporaneously issued by HHS propose that, with respect to family coverage, any premium variation for tobacco use must be applied to the portion of premium attributable to each family member. In the new wellness rules, the federal regulators have invited comments on the apportionment of rewards in health-contingent wellness programs (which may involve tobacco use and/or other health factors). For example, the regulators have requested comment on whether the reward should be prorated if only one family member fails to qualify for it.

Current law sets 20% as the maximum permissible reward for participation in a health-contingent wellness program. Effective for plan years beginning on or after January 1, 2014, the PPACA increased the maximum reward to 30%. The PPACA also authorized federal regulators to increase the maximum reward to as much as 50% if the regulators determine that such an increase is appropriate. In the new proposed rule, the regulators have determined that an increase of an additional 20 percentage points (to 50%) is warranted for health-contingent wellness programs designed to prevent or reduce tobacco use. As with other provisions in the new proposed rule, the 50% limit on tobacco-use-related incentives applies to group health coverage, whether insured or self-insured, or offered in the small group or large group market, and to both grandfathered group health plans and non-grandfathered group health plans.

While not directly relevant to large employers, federal regulators have also proposed that insurers issuing health insurance in the small group market (generally up to 100 employees) will be permitted to rate premiums for tobacco use (which the PPACA allows them to do in 2014) only if the insurer uses a wellness program that complies with these five special conditions.

Uniform availability and reasonable alternative standards. Under the proposed rule, the reward under a health-contingent wellness program must be available to all similarly situated individuals. As under current rules, to meet this requirement, a "reasonable alternative standard" (or waiver of the otherwise applicable standard) for obtaining the reward must be provided for any individual for whom, for that period, 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.

Said differently, the same full reward must be available to individuals who qualify by satisfying a reasonable alternative standard as is provided to individuals who qualify by satisfying the program's otherwise applicable standard. The proposed rule generally retains and clarifies the similar requirement under the HIPAA wellness regulation.

The proposed rule reiterates that instead of providing a reasonable alternative standard, a group health plan or issuer may waive the otherwise applicable standard and provide the reward. The plan or issuer may waive the otherwise applicable standard and provide a reward for an entire class of individuals, or may do so on an individual-by-individual basis based on the facts and circumstances presented.

Also, the proposed rule would not require group health plans and issuers to establish a particular alternative standard in advance of an individual's specific request for one. However, a reasonable alternative standard would have to be provided by the plan or issuer (or the condition for obtaining the reward would be required to be waived) upon an individual's request. The regulators note that with respect to tobacco cessation, "overcoming an addiction sometimes requires a cycle of failure and renewed effort." Consequently, plans and issuers cannot cease to provide a reasonable alternative standard merely because one was not successful before; they must continue to offer a reasonable alternative standard, whether it is the same standard or a new reasonable alternative standard (such as a new weight-loss class or a new nicotine replacement therapy).

The new rule requires that facts and circumstances must be taken into account in determining whether a group health plan or issuer has provided a reasonable alternative standard, including but not limited to the following proposed factors. Note, importantly, that these factors represent clarifications or new requirements that are not reflected in the current HIPAA-related wellness program rules.

  • If the reasonable alternative standard is completion of an educational program, the plan or issuer must make the educational program available instead of requiring an individual to find such a program unassisted and may not require an individual to pay for the cost of the program.
  • If the reasonable alternative standard is a diet program, the plan or issuer is not required to pay for the cost of food but must pay any membership or participation fee.
  • If the reasonable alternative standard is compliance with the recommendations of a medical professional who is an employee or agent of the plan or issuer, and an individual's personal physician states that the medical professional's recommendations are not medically appropriate for that individual, the plan or issuer must provide a reasonable alternative standard that accommodates the recommendations of the individual's physician with regard to medical appropriateness. Plans and issuers may impose standard cost sharing under the plan or coverage for medical items and services furnished in accordance with the physician's recommendations. The regulators also note, as an aside, that a claim denial (i.e., an adverse benefit determination) that is based on whether a participant or beneficiary is entitled to a reasonable alternative standard for a reward under a plan's wellness program would be considered to be a claim that involves medical judgment and therefore would be eligible for federal external review under a plan's external review provisions.
  • A group health plan or an issuer may require verification (if that is reasonable under the circumstances), 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 otherwise applicable standard. The proposed rule clarifies that it would not be reasonable for a plan or issuer to require verification of a claim that is obviously valid based on the nature of the individual's medical condition that is known to the plan or issuer. Plans and issuers are permitted under the proposed regulations to seek verification of claims that require the use of medical judgment to evaluate. The regulators have requested comments on whether additional clarifications would be helpful regarding the reasonableness of physician verification. Under current rules, an employer has an unfettered right to require an individual to provide a physician's verification in this context, so the proposed rule narrows this right and adds an element of subjectivity to the determination of when physician verification can be required.

Reasonable design. The proposed rule continues the requirement that health-contingent wellness programs must be reasonably designed to promote health or prevent disease, not be overly burdensome, not be a subterfuge for discrimination based on a health factor, and not be highly suspect in the method chosen to promote health or prevent disease.

The proposed rule continues to provide plans and issuers with flexibility and encourages innovation. There does not need to be a scientific record, for example, that a particular method promotes wellness to satisfy this reasonableness standard. The standard is intended to allow experimentation in diverse ways of promoting wellness.

The federal regulators have requested public comments on whether evidence-based or practice-based standards are needed to ensure that wellness programs are reasonably designed to promote health or prevent disease. The regulators are also seeking comments on best practices regarding evidence-based and practice-based strategies in order to increase the likelihood of wellness program success. The federal regulators point out that a relevant resource includes the Healthier Worksite Initiative of the Centers for Disease Control and Prevention.

Whether a health-contingent wellness program is reasonably designed is based on all the relevant facts and circumstances. In this regard, the proposed regulation includes a new requirement not present under current rules, namely that to the extent a plan's initial standard for obtaining a reward (or a portion of a reward) is based on results of a measurement, test or screening that is related to a health factor (such as a biometric examination or a health risk assessment), the plan is not considered to be reasonably designed unless it makes available to all individuals who do not meet the standard based on the measurement, test or screening a different, reasonable means of qualifying for the reward. This ensures that programs are not merely a subterfuge for discrimination or underwriting based on health factors such as weight, blood pressure, glucose levels, cholesterol levels or tobacco use.

As a result, the new rule retains the general approach that was part of the current HIPAA wellness rule that allows plans and issuers to conduct screenings and employ measurement techniques in order to target wellness programs effectively. Plans and issuers may, for example, target individuals with high cholesterol for participation in cholesterol-reduction programs, or individuals who use tobacco for participation in tobacco-cessation programs, rather than the entire population of participants and beneficiaries — provided that individuals who do not meet a plan's target biometrics (or similar standards) are provided a different, reasonable means of qualifying for the same reward. It appears, however, that in this context where the reward is based on the results of a measurement, test or screening, the proposed rule requires that a different, alternative means of qualifying for the reward be made available to all individuals, regardless of whether a medical condition makes it unreasonably difficult or medically inadvisable to achieve the desired results. If this was the federal regulators' intent, it would be a departure from the current rules and would broaden employers' obligations with respect to offering reasonable alternatives.

Notice of other means of qualifying for the reward. The proposed rule continues to require plans and issuers to disclose the availability of other means of qualifying for the reward or the possibility of waiver of the otherwise applicable standard in all plan materials describing the terms of a health-contingent wellness program. The new rule provides several new sample statements that are intended to be simpler for individuals to understand and to increase the likelihood that those who qualify for a different means of obtaining a reward will contact the plan or issuer to request it. For example, one of the new optional sample statements states:

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.

Another approved sample statement included in an example provides:

Your health plan wants to help you take charge of your health. Rewards are available to all employees who participate in our Cholesterol Awareness Wellness Program. If your cholesterol count is under 200, you will receive the reward. If not, you will still have an opportunity to qualify for the reward. We will work with you to find a Health Smart program that is right for you.

And yet another approved sample statement in one of the examples provides:

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 proposed rule states that the sample language, or substantially similar language, can be used to satisfy the notice requirement. The federal regulators have requested comments on the sample language. If plan materials merely mention that a program is available, without describing its terms, this disclosure is not required. For example, as mentioned in the preamble of the proposed rule, a summary of benefits and coverage required under the PPACA that notes that cost sharing may vary based on participation in a diabetes wellness program, without describing the standards of the program, would not trigger this disclosure.

Conclusion

This new proposed rule on legally compliant wellness programs in employer group health plans provides additional tools that can assist employer plan sponsors and insurers in managing employee health and plan costs. The arrival of this rule, along with other PPACA rules that were issued on the same day, also signals that the floodgates of regulatory guidance on health care reform have begun to open. A number of other rules that are crucial to employer plan sponsors have not arrived yet and are still expected, including rules on the employer shared responsibility (play-or-pay) mandate, the individual mandate and additional standards for public exchanges, among others.