Employer Wellness Programs: What Financial Incentives Are Permitted Under The Law?

The rising cost of health care is a serious concern for employers who provide health benefits to their employees. In 1960, health care spending accounted for 5 percent of the United States' Gross Domestic Product ("GDP"). As of 2008, it had risen to 17 percent. By 2018, health care spending is projected to comprise 20 percent of the GDP. [1] Companies have and continue to establish wellness programs for their employees in an effort to reduce company costs and employee illness-related absences, although views on the actual savings generated vary. [2] Eighty percent of small company (3-199 employees) health plans, and 60 percent of large company (200+ employees) health plans, offer wellness programs. [3] Employers who want to incorporate financial incentives into their wellness programs need to navigate a variety of federal and state laws barring discrimination that are implicated by wellness programs. Regulations recently issued by the Departments of Labor, Health and Human Services, and the Treasury have clarified how some of these restrictions operate following enactment of the Affordable Care Act ("ACA"), but they leave unanswered significant questions regarding the application of other laws, such as the Americans With Disabilities Act and the Genetic Information Nondiscrimination Act.

Types of Employer Wellness Programs

In general, a wellness program educates employees about health-related issues, promotes the maintenance of healthy lifestyles, and encourages employees to make healthier choices. Some programs may be purely educational and have no financial implications. For example, an employer may ask employees to complete a health risk assessment without offering any incentive or may offer free blood-pressure screenings or on-site exercise classes. Other wellness programs are tied to financial incentives that may take the form of reductions in the employee's share of the premium for health care coverage, reductions in co-pays or other cost-sharing, or straight payments of cash or cash equivalents, like gift cards. Ten percent of small companies and 41 percent of large companies offer financial incentives for participation in wellness programs. [4]

Requirements for Wellness Programs that are Group Health Plans

The first rules expressly targeting financial incentives and wellness programs were issued as part of the implementation of the Heath Insurance Portability and Accountability Act ("HIPAA"), which prohibits group health plans from discriminating in eligibility or premiums based on health factors. A wellness program is a "group health plan" if it provides medical care to participants or beneficiaries directly or through insurance, reimbursement, or otherwise, and is part of a group health plan if its rewards are linked to the group health plan. In addition, the HIPAA regulations require that benefits be offered uniformly to all similarly situated individuals but allow for "benign" discrimination in which individuals with adverse health factors are treated more favorably. Examples of this benign discrimination include extending eligibility for coverage to children over age 26 who are disabled and offering disease management programs. The HIPAA regulations also made an exception to this nondiscrimination requirement for wellness programs that meet certain requirements. This exception for wellness programs became part of the statute under the ACA with respect to what is called "nongrandfathered" coverage, effective for plan or policy years beginning on or after January 1, 2014. In adding the wellness program exception to the statute, Congress also increased the maximum reward that could be offered from 20 percent to 30 percent of the total cost of coverage and granted regulatory authority for an increase up to 50 percent. Final regulations under the ACA and HIPAA concerning the wellness program exception have recently been issued; these regulations apply to all group coverage (not just nongrandfathered coverage), effective for plan or policy years beginning on or after January 1, 2014. These final regulations are similar to the existing wellness program regulations with a few key distinctions. One distinction is that the final regulations provide that the maximum reward is increased, including an increase to 50 percent for wellness programs that are designed to prevent or reduce tobacco use. Another distinction is that the final regulations divide wellness programs into categories in a slightly different manner than do the existing rules. The final regulations also expand the requirement to offer a reasonable alternative program for wellness programs that require the participant to meet a standard.

Wellness Program Categories

The final ACA regulations divide wellness programs into three categories: (1) participatory; (2) activity-only, and (3) outcome-based. [5] Participatory Wellness Programs. In a "participatory" wellness program, the group health plan provides individuals with a financial incentive to participate in the program without requiring that the employee satisfy any health-related condition to receive the incentive. Examples of...