Final Wellness Program Regulations Offer One Piece in the Health Care Cost Puzzle
by Douglass Farnsworth, Trenam Kemker, Tampa, FL
The release of the long-awaited final regulations for wellness programs on December 13, 2006 (the "Final Regulations"), offers one more piece in the complex puzzle of the rising costs of health care. For many years, employers have struggled with how to minimize, let alone control, the rising costs of health care, but it is only in recent years that they have recognized the importance of enlisting the help of their employees in ways other than additional sharing of costs. Employers have begun experimenting with various approaches to employee engagement to improve their overall wellness, including targeting specific conditions through their health plans, and offering health risk assessments, education, and wellness programs.
The Case for Wellness
The business case for employers taking a greater role in the health and wellness of their employees has grown increasingly strong. Every year in the United States the increase in health care costs exceeds the overall rate of inflation by a factor of two to five times, including several years of double-digit increases in health plan costs to employers. At the same time, employees have seen their contribution to premium costs increase an average of 143 percent, and their out-of-pocket costs, including co-payments, increase an average of 115 percent.
Countless studies have shown that certain conditions impact employers' costs overall, not only for health care. A recent survey by the Midwest Business Group on Health of 160 employers found that 95 percent of employers now agree there is a direct link between an employee's health and workplace productivity. For example, a recently released survey reported in the Archives of Internal Medicine found that obese employee medical costs were seven times higher than average; those same employees file twice the average rate of worker compensation claims and miss thirteen times more workdays. A study conducted by the Centers for Disease Control found that the marginal cost increase for obese employees, combining medical costs and absenteeism, ranged from an additional $460 to $2,500 per employee. The Texas Comptroller found that the added costs related to obesity, including health care, absenteeism, and disability, totaled over $3.3 billion for Texas employers in 2005. In response to this trend, a recent survey by the consulting firm Watson Wyatt found that forty-two percent of employers are implementing programs specifically focused on reducing obesity.
As the title to this article conveys, wellness programs are one piece in the overall puzzle of improving employee health, and hopefully, in the process, reducing health care costs. Wellness programs may take a variety of forms, including the employer's provision of educational materials about healthy choices, health risk assessments or free gym memberships. The most successful plans integrate a variety of elements, including nutritional counseling, screenings, use of health data to target high-cost diseases, and incentives to motivate physical activity.
Employers are moving toward offering wellness programs at increasing rates. The most recent survey of 450 major U.S. employers by the consulting firm Hewitt Associates found that 79 percent of respondents intended to provide access to targeted condition management or wellness programs to their employees in 2007, up from 65 percent in 2006. At the same time, 48 percent of the employers indicated that they would be offering incentives to employees for participating in wellness initiatives, up from 38 percent the prior year.
Results from wellness programs are promising. Johnson & Johnson, well-known for its multi-faceted wellness program, has reported annual medical care savings of $225 per employee. Similarly, Motorola has reported reducing its annual health care cost increases to 2.5 percent for those employees participating in the program, compared to 18 percent increases for non-participants. On the employee side, a survey by Principal Financial Group found that 61 percent of employees believe wellness programs can help lower their own benefit costs, and 58 percent reported they had experienced reduced costs due to wellness programs. That same survey found that 55 percent of employees have been persuaded to remain with their current employers due to the wellness programs offered.
The Final Regulations
One impediment to the large-scale use of wellness programs by employers has been a feature of the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") known as the "nondiscrimination rules." The nondiscrimination rules generally prohibit group health plans from discriminating against individuals based on certain health factors, meaning a plan cannot, for example, require employees to stop smoking or face exclusion from the plan, or charge greater premiums to employees with a body mass index over 25.
A wellness program compliant with the Final Regulations provides an exception to the prohibition against treating individuals differently based on a "health factor." The health factors at issue are: health status, medical condition (both medical and mental), claims experience, receipt of health care, medical history, genetic information, evidence of insurability, or disability. Taken in combination, these factors prohibit discrimination based on any factor relating to an individual's health. Impermissible discrimination includes charging differential premiums or co-payments, providing rewards or refunds, applying different eligibility rules, or providing different benefits based on a health factor.
The Final Regulations take a common-sense approach, using a "reasonably designed" standard to balance the needs of employers to experiment with various programs to incentivize employee participation, while protecting employees from plans that are a mere subterfuge for discrimination. The commentary to the Final Regulations notes that the "reasonably designed" element, for instance, is meant to be an easy standard to satisfy for a plan if it has any reasonable chance for improving the health of participants and is not overly burdensome. The example given for showing the degree to which the agencies intend to be open-minded as to what may be done is a plan providing rewards to individuals who participate in a course of aromatherapy. The commentary warns, however, that "bizarre, extreme, or illegal" requirements will not be tolerated.
A wellness program is defined simply as "any program designed to promote health or prevent disease." The Final Regulations now allow for certain types of wellness programs that are deemed compliant with the regulations without meeting any additional requirements. In order for this section to apply, the plan must make participation in the wellness program open to all similarly-situated individuals, and cannot condition a reward on an individual satisfying a standard based on a health factor. Examples given include waiver of co-payments for preventive care, reimbursement for participation in a smoking cessation program without regard to success, rewards for attendance at health education meetings, and reimbursement of gym memberships.
For wellness programs that do not meet the above criteria (i.e., the program conditions a reward on satisfying a standard based on a health factor), the final rules require the program to meet five criteria:
- The value of the reward must not exceed 20 percent of the cost of employee-only coverage (or 20 percent of the corresponding cost if dependents may participate in the program).
- The program must be reasonably designed to promote health or prevent disease.
- The program must give individuals an opportunity to qualify for the reward at least once per year.
- The reward must be available to all similarly-situated individuals. A reasonable alternative must be offered to those individuals for whom it is unreasonably difficult or medically unadvisable to participate.
- The plan must disclose the availability of the alternative standard in any plan materials describing the terms of the program.
These requirements allow for considerable room for experimentation by employers, while still providing employees an opportunity to receive any offered reward. An example provided in the Final Regulations is a plan that will waive the following year's $250 annual deductible for individuals whose body mass index is between 19 and 26, but provides for an alternative of walking 20 minutes per day, 3 days a week, and further allows for the participant to submit a physician note if the walking program is medically unadvisable. Although the reward offered is directly linked to a standard based on a health factor, because it meets the five criteria, the waiver does not violate the HIPAA nondiscrimination rules.
Because of the common-sense approach taken in the Final Regulations, employers have an opportunity to experiment with various options for engaging employees to participate in health initiatives. As the cost of health care continues to rise, employers and employees will be further incentivized to take action to improve employee health, benefiting everyone.