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5 Requirements for Health Plan Related Incentives/Penalties Based on Health Status

Wellness plan provisions enabling employees to earn incentives or avoid penalties based on health status may be the trickiest part of workplace wellness program design.99528917

“Incentives or surcharges tied to a health plan (e.g., premium discounts or surcharges, deductible discounts or surcharges, etc.) are subject to HIPAA non-discrimination rules if contingent upon health conditions or risks such as smoking, hypertension, high cholesterol or obesity,” says Ed Fensholt, Lockton’s senior vice president and co-director of Compliance Services.

This is the second of two posts addressing the latest insights on workplace wellness programs. The first covered 6 Ways Wellness Design Intersects Federal & State Law.

The timing of this post is propitious, as the Department of Labor is now auditing wellness programs for compliance with HIPAA non-discrimination rules in five different categories where health plan-related incentives/penalties are based on health status:

1. The wellness program reward rate must be capped at 20 percent of the total cost of coverage. If only employees (as opposed to employees and families) are eligible for the wellness program, the “total cost of coverage” is the total cost (employer- and employee-paid portions) of employee-only coverage. If family members may participate the “total cost of coverage” is the total cost of the coverage tier under which the employee and his or her dependents are enrolled.  Health reform increases the cap from 20 percent to 30 percent in 2014, and all the way up to 50 percent for tobacco cessation programs, under recently proposed regulations.

2.  The wellness program must be bona fide—designed to enhance wellness. In other words, the DOL will not look kindly on subterfuge of any kind when it comes to attempts to circumvent non-discrimination rules. What’s more the penalty can’t be overly burdensome. For example, under proposed regulations, if the penalty or incentive is based on the results of a health screening, the employer must provide a method, such as a program, by which the incentive may be obtained or the penalty avoided—the plan can’t simply say “heal thyself,” says Fensholt.

3. Wellness program enrollees must have a chance to qualify for the incentive or avoid the penalty of non-compliance at least once a year. This does not mean the employer must keep the wellness program in place year after year; it simply means that if the employer does so, it must provide enrollees with the chance to qualify for the reward or avoid the surcharge, at least once per year.

4. The wellness program must reward the effort by allowing alternatives. Alternative standards for achieving the incentive or avoiding the penalty must be made available to those who can’t meet the award due to health factors. You might say that, in some ways, the plan must be designed to reward the effort: If the wellness program targets tobacco use, the employer might say at open enrollment: “If you don’t use tobacco you’ll receive a discount on your premium. If you do use tobacco, you can earn the discount by completing our smoking cessation program.” If an employee completes the program faithfully—even if he or she can’t quit smoking—the employee must receive the reward. The most an employer may require of the employee at that point is to bring, for example, a doctor’s note explaining that the employee can’t quit smoking due to his or her nicotine addiction.

Or let’s say the employer is targeting obesity and says at open enrollment: “If your BMI exceeds recommended levels, you’ll pay more for your health insurance. But you may earn your way out of that surcharge by participating in our weight loss wellness program and losing two pounds a week.” But some overweight employees might not be able to lose two pounds a week, due to a health condition. The wellness program must be willing to fashion an individualized standard for those employees. The employer might, for example, simply accept the recommendation of an employee’s doctor as the employee’s alternative standard: “My patient can’t be expected to lose two pounds a week, but could lose a pound a week.” Under recently proposed regulations, if completion of an educational or diet program is required to avoid the penalty, then the plan must pay for it, and imputed income issues may be in play, Fensholt adds.

5. The wellness program must communicate the availability of alternative standards for achieving the incentive or avoiding the penalty. Language to the following should be employed: “If it’s unreasonably difficult for you to attain the standards for the reward under this program, or if it is medically inadvisable for you to attempt to meet the standards for this reward under this program, call us at {insert number} and we’ll work with you to find a suitable alternative.” Proposed health reform regulations also improve on this language a lot.

What challenges does your organization face? Share your comments below.

For more information on how Lockton can help your organization identify the best solution for your employee health-care benefits program, please contact me at rruotolo@lockton.com.

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