On June 3, 2013, the Departments of Health and Human Services (HHS), Labor (DOL), and the Treasury (collectively, the Departments) published joint final regulations in the Federal Register implementing the Affordable Care Act (ACA) requirements for wellness programs. More specifically, the final rule applies to group health plans that offer wellness programs with a financial reward component to employees for improving their health or impose financial penalties for not participating in wellness programs or for choosing to smoke. The final regulations will be effective August 2, 2013, and will apply to group health plans for plan years beginning on or after January 1, 2014.

The federal government believes wellness programs can promote health and prevent disease, cut U.S. healthcare costs in general and decrease the cost of employer-sponsored health insurance. The recently-issued final regulations promote wellness programs by increasing the maximum permissible reward under certain wellness programs from 20% to 30% of the total cost of coverage and increasing the maximum permissible reward to 50% of the total cost of coverage for wellness programs designed to stop or reduce tobacco use.

Another major piece of the final regulations addresses the issue of employee discrimination based upon employee health status to ensure that the wellness programs are not “subterfuge for discrimination based on a health factor.”[1] The Departments seek to clarify the ACA requirements for wellness programs to meet the “reasonable design” and “reasonable alternatives” standards. The regulations set forth criteria that group plans and employers can comply with in order to defend against a claim of discrimination by an employee based on their health status.

The overall intent of the regulations is to prevent discrimination through the requirements for particular types of wellness programs, detailed below. The Departments attempt to achieve this intent while maintaining “an easy standard to satisfy” so that all employees can participate.[2] The final regulations are intended to provide plans “flexibility and encourage innovation” in the design of wellness programs.[3]

Another key point the final regulations highlight is that in using the term “rewards,” the Departments refer not only to premium discounts, rebates, additional health benefits or other financial incentives, but also to avoiding a penalty, surcharge or other financial disincentive. Such a definition is in line with certain wellness programs that made headlines recently, including CVS Pharmacy and Florida’s Broward County’s programs, that assess a penalty against employees for non-participation in lieu of offering financial incentives.[4]

Overview Regarding Types of Wellness Programs

The final regulations continue to utilize the same classifications of wellness programs delineated in HIPAA and the ACA. The two broad categories of wellness programs are: participatory wellness programs and health-contingent wellness programs.

Participatory wellness programs constitute a majority of wellness programs.[5] They either do not provide a reward or do not include any conditions for obtaining a reward that are based on an individual’s health status. Examples of participatory wellness programs include programs that reimburse employees for all or part of the cost of a fitness center membership, rewards for participating in a diagnostic testing program that does not base any part of the reward on the results, and a program that rewards employees for attending a monthly, no-cost health education seminar.

The other broad category of wellness programs is the health-contingent wellness program. Unlike participatory wellness programs, health-contingent wellness programs do require individuals to satisfy a standard related to a health factor in order to obtain a reward or avoid a penalty. This standard may require completing an activity related to a health factor, (termed an activity-only program) or attaining and maintaining a specific health outcome (termed an outcome-based program.) An example of an activity-only wellness program is an exercise program for which performing or completing the program is the only requirement to satisfy the standard for the financial reward. In contrast, outcome-based wellness programs, require an individual to attain or maintain a specific health outcome to obtain a reward. An example of an outcome-based wellness program is an anti-smoking program that rewards individuals who do not smoke.

Both types of health-contingent wellness programs must satisfy specific requirements, detailed below, to not be deemed discriminatory under the ACA wellness program anti-discrimination provisions. The risk of non-compliance includes enforcement of requirements via a civil action brought by regulators and/or a lawsuit brought by individual employees.

Health-Contingent Wellness Program Requirements (Activity-only and Outcome-based)

The five requirements for health-contingent wellness programs to be in compliance with the ACA wellness exception to nondiscrimination are:

Individuals eligible for the wellness program must be given the opportunity to qualify for the reward at least once per year; The total reward (or absence of a penalty surcharge) offered to an individual under all health-contingent wellness programs cannot exceed 30% of the total cost of employee-only coverage, or 50% of total cost of employee-only coverage for programs preventing or reducing tobacco use; The wellness program must be “reasonably designed” to promote health or prevent disease; The reward must be available to all “similarly situated individuals,” by providing a “reasonable alternative standard” or waiver of the original applicable standard for any individual for whom it is unreasonably difficult to meet standards due to a medical condition; and The wellness program must disclose the availability of other means for qualifying for the reward (“reasonable alternative standard”) or the waiver.

A key point to note is that a physician may provide verification of the medical condition that makes it unreasonable for an individual to meet the original standard in an activity-only wellness program. In contrast, under the outcome-based wellness program, a reasonable alternative standard must be provided to all individuals who do not meet the initial standard, and no physician verification can be required to provide this alternative.

Participatory Wellness Programs Requirements

Since participatory wellness programs do not provide rewards or base conditions for obtaining rewards on any health factor, the final rule deems them to be in compliance with the nondiscrimination requirements of the ACA. In other words, as long as participation in the program is available to all similarly situated individuals, regardless of health status, participatory wellness programs do not need to meet the rule requirements for health-contingent wellness programs.

Calculating Rewards or Penalty Amounts

To clarify how the new maximum permissible reward of the final rule is calculated, take this example from the regulations:

Facts: 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 employer plan offers employees a health-contingent wellness program focused on decreasing or maintaining a healthy blood sugar level, weight, cholesterol level and blood pressure. The reward for compliance is an annual premium rebate of $600.

The plan also imposes an additional $2,000 surcharge or penalty for employees who have used tobacco in the last 12 months and who are not enrolled in the plan’s reasonably alternative standard smoking cessation program. Those who participate in the smoking cessation program are not penalized with the $2,000 surcharge.

Calculation: The $600 rebate reward for meeting the non-tobacco related health-contingent wellness program does not exceed the final rule’s 30% permissible reward maximum of the total annual cost of $6000 (30% of $6000 = $1800).

Additionally, the reward of avoiding the $2000 penalty surcharge for participating in the tobacco health-contingent wellness program does not exceed the 50% permissible reward maximum of the total annual cost of $6000 (50% of $6000 = $3000).

When total rewards are taken together, $600 + $2000, the $2600 sum of rewards does not exceed the maximum 50% permissible reward of $3000. Under the ACA wellness program requirements, this plan design would be in compliance.

Looking Ahead

Employers and issuers have until January 1, 2014, to ensure that their wellness programs comply with the final rule. The rule applies to plan years beginning on or after the first of the new year, and includes grandfathered plans.

Whether the increased permissible rewards from the final rule increases employee participation in wellness programs and has the desired cost-cutting effects remains to be seen. Workplace wellness programs have achieved a high penetration in the United States. A 2009 RAND survey sponsored by the DOL and HHS reports that 92% of employers with 200 or more employees offered wellness programs.[6] However, a 2010 survey suggested that fewer than 20% of eligible employees participated in wellness programs.[7] Yet with the final rule’s increase in both potential rewards and penalties, employers may see an uptick in both demand for wellness programs and employee participation.