The Department of Health and Human Services, Department of Labor, and Department of the Treasury (collectively, the Departments) recently released proposed regulations clarifying and amending the standards for nondiscriminatory wellness programs to reflect changes to existing provisions made by the Patient Protection and Affordable Care Act of 2010. The proposed regulations (2014 Proposed Rules) would apply to all group health plans (including grandfathered plans) and group health insurance coverage for plan years beginning on or after January 1, 2014, if adopted as final regulations.
HIPAA Prohibits Discrimination Based on a Health Factor
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) generally prohibits group health plans and group health insurance issuers from discriminating against individual participants and beneficiaries based on a health factor. Health factors include health status, medical condition, claims experience, receipt of health care, medical history, genetic information, evidence of insurability, and disability. However, wellness programs designed to promote health or prevent disease, including those that offer rewards to employees for participating, are excepted from the HIPAA nondiscrimination provisions if they meet certain conditions.
Wellness Programs Exception
The 2014 Proposed Rules build upon regulations issued by the Departments in 2006 related to the wellness program exception (2006 Rules) while maintaining the two distinct categories of programs established under the 2006 Rules: participatory wellness programs and health-contingent wellness programs.
Highlights: Key Changes from the Existing HIPAA Non-Discrimination Wellness Program Requirements Include:
- Increases maximum total reward to 30% (50% for programs related to preventing or reducing tobacco use);
- Clarifies requirements for alternative standards, including the extent to which the plan sponsor must pay for alternative standard program features; and
- Simplifies model language notifying individuals about the availability of reasonable alternative standards.
Participatory Wellness Programs
Participatory wellness programs (previously called participation only programs) either do not require an individual to meet a standard related to a health factor in order to obtain a reward, or do not offer a reward at all. For example, an employer may offer a fitness center reimbursement program, a reward for attending a free health education seminar, or a diagnostic testing program that does not base the reward on test outcomes. These programs comply with the HIPAA nondiscrimination requirements without having to satisfy any additional standards if they are offered to all similarly situated individuals. There is no limit on the financial incentives allowed for participatory programs. The 2014 Proposed Rules are consistent with the 2006 Rules for participatory wellness programs.
Drinker Biddle Comment: Keep in mind that different rules apply to whether a reward provided is taxable income to the participant. So, even if the program is participatory (and therefore not subject to the five requirements for health-contingent programs described below), the reward offered may be taxable income under federal and/or state law. A common example is reimbursement of fitness center membership fees.
Health-Contingent Wellness Programs
Health-contingent wellness programs (previously called standard-based programs) require individuals to satisfy a standard related to a health factor in order to obtain a reward. Under the 2014 Proposed Rules, a “reward” includes both an incentive in the form of a reward (e.g. premium discount, waiver of cost-sharing amount, an additional benefit or any other financial or other incentive) and an incentive in the form of a penalty (e.g., a premium surcharge or other financial or nonfinancial disincentive). Health-contingent programs include programs that reward an employee for not smoking, attaining certain results on screenings, or meeting targets for exercise, among others. Some popular rewards are reduced premiums, employer contributions to a health flexible spending account or having savings account, cash, and gift cards. Plans may offer rewards based on whether an individual has met the standards of a wellness program only if the program does not discriminate based on a health factor. The 2014 Proposed Rules build upon the same standards for health-contingent wellness programs to be considered nondiscriminatory included in the 2006 HIPAA regulations, with some important changes and clarifications:
1. Size of Reward
- 2006 Rules: The total reward for all wellness programs under a plan cannot exceed 20% of the total cost of employee-only coverage under the plan (including both employee and employer contributions). If dependents participate in the wellness program, the total cost of coverage considered is the coverage in which the employee and dependent(s) are enrolled.
- 2014 Proposed Rules: The 2014 Proposed Rules increase the specified percentage from 20% to 30% of the cost of coverage. Further, if the program is designed to prevent or reduce tobacco use, the maximum reward is 50% of the total cost of coverage.
Drinker Biddle Comment: The increased maximum reward will allow plan sponsors to promote wellness with added incentives, which may include adding new varieties of wellness initiatives as new ideas and programs for encouraging good health and healthy behavior develop.
2. Reasonable Design
- 2006 Rules: The program must be reasonably designed to promote health or prevent disease. For this purpose, it must have a reasonable chance of improving health or preventing disease, not be overly burdensome, not be a subterfuge for discriminating based on a health factor, and not be highly suspect in method.
- 2014 Proposed Rules: Determining whether a program is reasonably designed is based on all of the facts and circumstances. If a plan’s initial standard for obtaining a reward is based on the results of a measurement, test, or screening related to a health factor, the plan must make available a different, reasonable means of qualifying for the reward for individuals who do not meet the standard.
3. Frequency of Opportunity to Qualify
- 2006 Rules: The program gives eligible individuals an opportunity to qualify for the reward at least once per year.
- 2014 Proposed Rules: No change.
4. Uniform Availability and Reasonable Alternative Standard
- 2006 Rules: The reward must be available to all similarly situated individuals. For this purpose, a reasonable alternative standard (or waiver of the otherwise applicable standard) must be made available to any individual for whom it is unreasonably difficult due to a medical condition to satisfy the otherwise applicable standard during that period (or for whom it is medically inadvisable to attempt to satisfy the otherwise applicable standard). A plan may seek verification from an individual’s physician that an alternative is needed. once per year.
2014 Proposed Rules: Plans are not required to determine an alternative standard in advance, but one must be provided (or the otherwise applicable standard waived) if requested. Whether the alternative standard is reasonable is based on all of the facts and circumstances. The 2014 Proposed Rules clarify what is reasonable in some circumstances. For example:
- If the reasonable alternative standard is completion of an educational program, the plan must find an alternative program for the individual and pay for its cost.
- If the alternative standard is a diet program, the plan must pay any membership or participation fee but need not pay for the cost of food.
- If the alternative standard is compliance with the recommendations of a medical professional related to the plan, and an individual’s personal physician finds that the plan’s recommendations are not medically appropriate for the individual, the plan must provide a reasonable alternative standard that accommodates the recommendations of the individual’s physician. In this case, plans may impose standard cost sharing for medical items and services furnished pursuant to the physician’s recommendations.
A plan may seek verification from an individual’s physician that an alternative is needed, if reasonable under the circumstances. The 2014 Proposed Rules clarify that it would be unreasonable to seek verification of an obviously valid claim based on the nature of the individual’s medical condition known to the plan.
Drinker Biddle Comment: These clarifications are intended to help prevent health-contingent wellness programs that provide little or no support to improving an individual’s health. Plan sponsors will want to carefully consider the standards and alternatives offered in light of these clarifications.
5. Notice of Availability of Other Ways to Qualify for Reward
- 2006 Rules: In all plan materials describing the terms of the program, the availability of a reasonable alternative standard (or the possibility of waiver of the otherwise applicable standard) must be disclosed.
- 2014 Proposed Rules: The plan must disclose the option of alternatively qualifying for the reward or waiver of the standard in materials describing the terms of the program. If plan materials only mention the existence of the program, without describing its terms, disclosure is not required. The following new sample language satisfies this requirement:
“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.”
Drinker Biddle Comment: The new sample language is intended to be simpler to understand and to increase the likelihood that those who qualify for an alternative standard will contact a plan to request it.
Other Compliance Issues
This is a good time for employers to begin to consider their wellness programs in light of the new standards proposed in the 2014 Proposed Rules, as well as to ensure compliance with various other laws that impact wellness programs, including the Genetic Information Nondiscrimination Act of 2008, the Americans with Disabilities Act of 1990, as amended, federal and state tax laws, and continuation coverage rules under COBRA. Other federal and state laws may also impact wellness programs. For your reference please refer to our Legal Compliance Checklist via this link. Legal Compliance Checklist for Wellness Programs