Final HIPAA Nondiscrimination Regulations Spur Employers to Review Workplace Wellness Programs
Long awaited final regulations addressing, among other things, the "bona fide wellness program" exception to the HIPAA non-discrimination requirements were released on December 13, 2006, by three federal agencies. The nondiscrimination requirements, which are found in Section 702 of the Employee Retirement Income Security Act (ERISA) (as amended by HIPAA), generally prohibit plan sponsors from using a health factor as a basis for discrimination with regard either to eligibility to enroll or for determining premium contributions under a group health plan. These final regulations, issued jointly by the Departments of Treasury, Labor and Health and Human Services, provide helpful clarifications and modifications to the interim rules published in 1997 and 2001. While the effective date of the regulations is February 12, 2007, the new rules afford employers until July 1, 2007, at the earliest, to comply with the final standards (for calendar year plans, January 1, 2008).
The final regulations arrive as employers increasingly are including financial incentives in workplace wellness programs. They make clear that some, but not all, health promotion and disease prevention programs are subject to HIPAA's additional non-discrimination requirements.
"The distinctions are nuanced but critical," says Frank Alvarez, Jackson Lewis partner and Coordinator of the Firm's Disability, Leave & Health Management Practice Group. "If the final regulations apply, it may be necessary for plan sponsors to modify premium discount or rewards and design more specific procedures for addressing the needs of employees who cannot satisfy the program requirements due to medical conditions." Alvarez notes, however, that the increased certainty provided by the new regulations may create opportunities to design programs that escape the HIPAA regulations. "If that can be done, there would be even greater flexibility in the types of wellness incentives employers may offer."
Plan sponsors must proceed with caution, however, in exercising flexibility in designing and administering their wellness programs. Failure to comply with the HIPAA nondiscrimination requirements, which includes the failure of a wellness program to meet the applicable requirements under these regulations, will subject the plan to excise taxes under Internal Revenue Code Section 4980D(a). The excise tax generally amounts to $100 for each day the plan is not compliant with respect to each individual to whom the failure relates. In addition, as discussed below, other federal and state laws, such as the Americans with Disabilities Act, must be taken into account.
Basic Rules for Wellness Programs
Programs are subject to the HIPAA non-discrimination requirements only if they condition receipt of a reward on satisfying a standard that is related to a health factor, or if they offer a reward for participating in the program. The regulations provide the following examples of programs that are not subject to the HIPAA non-discrimination standards (this assumes participation is available to all similarly situated individuals):
- A program that reimburses all or part of the cost for 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 co-payment or deductible requirement under a group health plan for the costs, for example, of prenatal care or well-baby visits.
- A program that reimburses employees for the costs of smoking cessation programs without regard to whether the employee quits smoking.
- A program that provides a reward to employees for attending a monthly health education seminar.
Programs that are covered under the HIPAA non-discrimination standards must meet five requirements:
- There must be limitations on the size of the reward.
- The program must be reasonably designed to promote good health or prevent disease.
- The program must give individuals eligible for the program the opportunity to qualify for the reward at least once a year.
- The reward must be available to all similarly situated individuals unless the program provides for a reasonable alternative standard or waiver for individuals who have difficulty meeting the standard due to a medical condition.
- All plan materials describing the program must disclose the existence of a reasonable alternative standard or possibility of a waiver.
Limitations on the Reward
The regulations clarify that a "reward" could include a discount or rebate of a premium contribution, a waiver of all or part of a cost-sharing mechanism (such as deductibles, co-payments, or coinsurance), the absence of a surcharge, or the value of a benefit that would otherwise not be provided under the plan.
To satisfy the HIPAA rules, the reward cannot exceed 20% of the cost of employee-only coverage under the plan. The proposed regulations provided that the cost of employee-only coverage would be determined based on the total amount of employer and employee contributions for the benefit package under which the employee was receiving coverage. Some plan sponsors were concerned that limiting the reward to a percentage of employee-only coverage would not provide a sufficient incentive for those with family coverage. The final regulations clarify that if, in addition to employees, any class of dependents (such as spouses or spouses and dependent children) participate in the wellness program, the limit on the reward is based on the cost of the coverage category in which the employee and any dependents are enrolled. For example, if the annual premium for employee-only coverage is $3,600 and the annual premium for family coverage is $9,000, the annual reward for participating in the wellness program could not exceed $720 (20% of the employee-only cost of $3,600). If, however, any class of dependents is allowed to participate in the program and the employee is enrolled in family coverage, the plan could offer the employee a reward of up to $1,800 (20% of the cost of family coverage).
According to the regulations, the percentage limit on the reward is designed to avoid a reward or penalty that is so large as to have the effect of denying coverage or creating too heavy a financial penalty on individuals who do not satisfy an initial wellness program standard that is related to a health factor.
Reasonable Design to Promote Good Health or Prevent Disease
The "reasonably designed" requirement is intended to be an "easy" standard to satisfy, according to the "overview" of the regulations released by the Departments. The regulations state a program satisfies this standard if "it has a reasonable chance of improving the health of or preventing disease in participating individuals and it is not overly burdensome, is not a subterfuge for discriminating based on a health factor, and is not highly suspect in the method chosen to promote or prevent disease." A program probably would not be reasonably designed to promote good health or prevent disease if it imposed, as a condition to obtaining a reward, an overly burdensome time commitment or a requirement to engage in illegal behavior.
Annual Opportunity to Qualify
The final regulations clarify that a program permitting individuals to qualify for a reward at least once per year will not automatically satisfy the "reasonably designed" standard. Instead, the once-per-year requirement is independent of the requirement that the program be reasonably designed to promote good health or prevent disease; both must be satisfied.
Available to All Similarly Situated Individuals
To satisfy the exception that programs be available to all similarly situated individuals, the program must allow a reasonable alternative standard (or waiver of the applicable standard) for obtaining the reward for any individual for whom, for that period, it either is (i) unreasonably difficult to satisfy the standard due to a medical condition or (ii) medically inadvisable to attempt to satisfy the standard. A plan sponsor may seek verification, such as a statement from an individual's physician, that a health factor makes it unreasonably difficult or medically inadvisable for the individual to satisfy or attempt to satisfy the standard.
The Departments received comments seeking greater clarity on the kinds of "reasonable alternatives" that would be acceptable, citing the significant burden created by the need to develop such alternatives. The Departments rejected these requests, noting that the final regulations provide that plan sponsors can avoid this burden by lowering the standard, substituting a different standard or waiving the standard entirely. In addition, they said plan sponsors could implement as an alternative standard the requirement that an individual follow the recommendations of his or her physician regarding the health factor at issue. Still, plan sponsors will need to carefully consider some of the practical issues that arise in the course of designing, administering and enforcing these alternatives. They would also need to consider related issues, such as the privacy and data security of the information used to verify compliance with the program.
Description of Program
While plan materials must disclose that some reasonable alternative standard will be made available, they are not required to describe specific reasonable alternative standards. Where, however, a program merely is mentioned (such as in an employee handbook), and does not describe the general standard required under the program, the disclosure of the availability of the reasonable alternative is not required. The regulations provide sample language that would satisfy the disclosure requirements.
Application of Other Laws
Satisfying the HIPAA requirements for a wellness program is not the end of the inquiry into whether a program is permissible. Significantly, the regulations caution that efforts to comply with the HIPAA non-discrimination requirements may cause plan sponsors to run afoul of other federal or state laws, such as the Americans with Disabilities Act's provisions governing disability-related inquiries and medical examinations. Because many wellness programs require or encourage employees to disclose medical conditions with the goal of improving health and preventing or managing disease, they must be scrutinized closely. The size of the incentive, for example, may render an otherwise voluntary medical inquiry or examination "involuntary" under the ADA, by making a response practically irresistible. Employers sponsoring wellness programs should review wellness programs carefully to ensure compliance with the ADA and other federal and state laws.
For more information, please contact Francis P. Alvarez (firstname.lastname@example.org) or Joseph J. Lazzarotti (email@example.com) in the White Plains office at 914-328-0404, or Michael J. Soltis (firstname.lastname@example.org) in the Stamford office at 203-961-0404.