The media has crucified CVS Caremark (CVS) for its recent announcement on March 20, 2013, to implement a wellness program that will require its employees that enroll in the company’s medical plan to have an annual wellness review or face a $600 penalty. However, it’s difficult to fault a large employer for creatively trying to cut its health care costs. With the implementation of “ObamaCare,” the Affordable Care Act (ACA) is steadily increasing the requirements for employers, which is causing a steep increase in healthcare premium costs for employers. Not to mention that the unhealthy behaviors of the U.S. workforce are costing employers an average of $670 per employee annually. To find some equilibrium in the midst of increasing statutory health care requirements, employers like CVS are looking to join forces with employees to facilitate minimizing costs through wellness programs.

The Wellness Plan: CVS Model. You may wonder, what exactly is a wellness plan and how useful is it in cutting costs? The wellness plan is a beneficial tool for employers to encourage employees to live a healthier lifestyle and reduce the risk of disease. Generally, the wellness plan is an employer-sponsored program to lower health plan costs and improve employee health through promoting health, preventing disease, encouraging lifestyle changes, testing for diseases, and assessing health risks. By improving employee health, the workplace wellness program is proving to effectively contribute to a company’s bottom line. According to research conducted by the Wellness Council of America, a $1 investment in wellness programs saves $3 in health care costs.

Taking a closer look at the CVS model, the ultimate goal is to increase cost savings through cost shifting to its unhealthy workers. As a large employer with approximately 200,000 employees, CVS is implementing a health screening and wellness review which measures each employee’s height, weight, body fat, blood pressure, glucose, and body lipids. The company will pay for the health screening and in exchange, employees will be asked to sign an agreement stating the screening is voluntary and agreeing to release their medical information to WebMD, which provides health management programs and benefit support to CVS. More importantly, CVS will not have access to individual results, only whether the employee participated in the screening. Under the Health Insurance Portability and Accountability Act (HIPAA), it is illegal for employers to know an employee’s weight or other personal health information. Employees who choose not to participate in the wellness plan are subject to a $600 penalty in the form of increased contributions to their health insurance coverage.

Affordable Care Act, Equal Employment Opportunity Commission, and the Wellness Plan. Employers should be happy to know that the ACA encourages wellness programs, primarily through advocating those programs that reward employees for changing health-related behavior or improving measurable health outcomes. Current law enables employers to allocate incentives up to 20 percent of the individual employee’s health care premium. Next year this percentage is expected to increase up to 30 percent.The EEOC, which implements the ACA, has not established a formal position on this issue. However, the agency has issued several informal discussion letters, the most recent focusing on the voluntary aspect of the wellness plan.

The EEOC supports wellness programs so long as the employer neither requires employee participation nor penalizes employees who do not participate. Employers should take heed that CVS’ policy is very new and could raise some concerns, because the $600 increase in annual contributions for uncooperative employees is likely to be construed as a penalty. However, there is an easy fix, should it become an issue. CVS can phrase the policy in the form of an incentive by rewarding employees and reducing their contributions by $600 in exchange for their participation in the wellness plan. Ultimately, CVS’ plan passes muster for now, since there is no official policy in effect to regulate employers’ use of incentives versus penalties in reducing their healthcare premium costs.

Legal Challenges in Response to the Wellness Plan. Contrary to popular belief, CVS is not the first employer to venture out and explore the realm of reducing costs via wellness initiatives. The last few years have reflected an increasing trend of employers using incentives to encourage employees to take charge of their health and make better lifestyle choices. As expected, employers have received pushback from employees in the form of legal action. But prospective employers interested in exploring wellness plans, fear not! There have only been two recent legal challenges to wellness initiatives, both of which have failed.

The first challenge resulted in the 2009 ruling from the First Circuit, holding that an employer did not violate an employee’s privacy when it terminated him after finding nicotine in his urine. This case, Scott Rodrigues v. EG Systems, Inc., stemmed from EG System’s wellness program titled “LiveTotal Health initiative.” This wellness program’s primary goal was to reduce smoking among its employees by prohibiting employees from using tobacco at any time and also through providing resources to help smokers quit. EG System’s tested employees for nicotine pursuant to its initiative. The court held that plaintiff Rodrigues “does not have a protected privacy interest in the fact that he is a smoker because he has never attempted to keep that fact private.”

The second challenge, raised in Seff v. Broward County, resulted in the August 2012 ruling from the Eleventh Circuit, holding that a group plan requiring participants to complete a health risk assessment and undergo a health screen in order to obtain a $20 premium discount per paycheck did not violate the Americans with Disabilities Act (ADA), because the program was exempt under the ADA’s bona fide plan exemption.

Prior to this decision, many employers were reluctant to implement wellness plans due to the concerns and challenges posed by the ADA. The ADA prohibits employers from making disability-related inquiries or relating medical examinations of prospective or current employees unless they are job-related or subject to a business necessity exception. An inquiry is “disability-related” if an individual’s response to the inquiry could reasonably be expected to disclose the presence of a protected disability. This presents a major problem since most wellness programs utilize generalized medical exams, health screens, and health assessments. However, these inquiries are allowed under the ADA if they are completely voluntary or if the questions are not disability related. Furthermore, there is an ADA statutory exemption for Bona Fide Benefit Plans.

So what are the takeaways for employers? First, it’s perfectly acceptable to venture out and implement health initiatives to reduce health insurance premiums. Second, in light of the recent EEOC letters, employers should carefully consider the reward/penalty aspect of any wellness plan and focus on using incentives to induce employees into making healthier lifestyle choices. Finally, in light of privacy laws, employers should follow CVS’ lead and utilize third party administrators to track employee data derived from wellness plans.