Nondiscrimination and Wellness Programs in Health Coverage in the
Group Market
[12/13/2006]
Volume 71, Number 239, Page 75013-75055
[[Page 75013]]
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Part III
Department of the Treasury
Internal Revenue Service
26 CFR Part 54
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Department of Labor
Employee Benefits Security Administration
29 CFR Part 2590
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Department of Health and Human Services
Centers for Medicare & Medicaid Services
45 CFR Part 146
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Nondiscrimination and Wellness Programs in Health Coverage in the Group
Market; Final Rules
[[Page 75014]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 54
[TD 9298]
RIN 1545-AY32
DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2590
RIN 1210-AA77
DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
45 CFR Part 146
RIN 0938-AI08
Nondiscrimination and Wellness Programs in Health Coverage in the
Group Market
AGENCIES: Internal Revenue Service, Department of the Treasury;
Employee Benefits Security Administration, Department of Labor; Centers
for Medicare & Medicaid Services, Department of Health and Human
Services.
ACTION: Final rules.
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SUMMARY: This document contains final rules governing the provisions
prohibiting discrimination based on a health factor for group health
plans and issuers of health insurance coverage offered in connection
with a group health plan. The rules contained in this document
implement changes made to the Internal Revenue Code of 1986 (Code), the
Employee Retirement Income Security Act of 1974 (ERISA), and the Public
Health Service Act (PHS Act) enacted as part of the Health Insurance
Portability and Accountability Act of 1996 (HIPAA).
DATES: Effective date. These final regulations are effective February
12, 2007.
Applicability dates. These final regulations apply for plan years
beginning on or after July 1, 2007.
FOR FURTHER INFORMATION CONTACT: Russ Weinheimer, Internal Revenue
Service, Department of the Treasury, at (202) 622-6080; Amy Turner or
Elena Lynett, Employee Benefits Security Administration, Department of
Labor, at (202) 693-8335; or Karen Levin or Adam Shaw, Centers for
Medicare & Medicaid Services, Department of Health and Human Services,
at (877) 267-2323 extension 65445 and 61091, respectively.
Customer Service Information: Individuals interested in obtaining
copies of Department of Labor publications concerning health care laws
may request copies by calling the Department of Labor (DOL), Employee
Benefits Security Administration (EBSA) Toll-Free Hotline at 1-866-444-
EBSA (3272) or may request a copy of the Department of Health and Human
Services (HHS), Centers for Medicare & Medicaid Services (CMS)
publication entitled ``Protecting Your Health Insurance Coverage'' by
calling 1-800-633-4227. These regulations as well as other information
on HIPAA's nondiscrimination rules and other health care laws are also
available on the Department of Labor's Web site (http://www.dol.gov/ebsa
), including the interactive web pages Health Elaws.
SUPPLEMENTARY INFORMATION:
I. Background
The Health Insurance Portability and Accountability Act of 1996
(HIPAA), Public Law 104-191 (110 Stat. 1936), was enacted on August 21,
1996. HIPAA amended the Internal Revenue Code of 1986 (Code), the
Employee Retirement Income Security Act of 1974 (ERISA), and the Public
Health Service Act (PHS Act) to provide for, among other things,
improved portability and continuity of health coverage. HIPAA added
section 9802 of the Code, section 702 of ERISA, and section 2702 of the
PHS Act, which prohibit discrimination in health coverage based on a
health factor. Interim final rules implementing the HIPAA provisions
were published in the Federal Register on April 8, 1997 (62 FR 16894)
(1997 interim rules). On December 29, 1997, the Department of Labor,
the Department of Health and Human Services, and the Department of the
Treasury (the Departments) published a clarification of the April 1997
interim rules as they relate to individuals who were denied coverage
before the effective date of HIPAA on the basis of any health factor
(62 FR 67689).
On January 8, 2001, the Departments published interim final
regulations (2001 interim rules) on many issues under the HIPAA
nondiscrimination provisions (66 FR 1378) and proposed regulations on
wellness programs under those nondiscrimination provisions (66 FR
1421). These regulations being published today in the Federal Register
finalize both the 2001 interim rules and the proposed rules.
II. Overview of the Regulations
Section 9802 of the Code, section 702 of ERISA, and section 2702 of
the PHS Act (the HIPAA nondiscrimination provisions) establish rules
generally prohibiting group health plans and group health insurance
issuers from discriminating against individual participants or
beneficiaries based on any health factor of such participants or
beneficiaries. The 2001 interim rules --
Explained the application of these provisions to benefits;
Clarified the relationship between the HIPAA
nondiscrimination provisions and the HIPAA preexisting condition
exclusion limitations;
Explained the application of these provisions to premiums;
Described similarly situated individuals;
Explained the application of these provisions to actively-
at-work and nonconfinement clauses; and
Clarified that more favorable treatment of individuals
with medical needs generally is permitted.
In general, these final regulations do not change the 2001 interim
rules or the proposed rules on wellness programs. However, these
regulations do not republish the expired transitional rules regarding
individuals who were denied coverage based on a health factor prior to
the applicability date of the 2001 interim rules. (These regulations do
republish, and slightly modify, the special transitional rule for self-
funded nonfederal governmental plans that had denied any individual
coverage due to the plan's election to opt out of the nondiscrimination
requirements under 45 CFR 146.180, in cases where the plan sponsor
subsequently chooses to bring the plan into compliance with those
requirements). These regulations clarify how the source-of-injury rules
apply to the timing of a diagnosis of a medical condition and add an
example to illustrate how the benefits rules apply to the carryover
feature of health 0reimbursement arrangements (HRAs). For wellness
programs, the final regulations clarify some ambiguities in the
proposed rules, make some changes in terminology and organization, and
add a description of wellness programs not required to satisfy
additional standards.
Application to Benefits
Under the 2001 interim rules and these regulations, a plan or
issuer is not required to provide coverage for any particular benefit
to any group of similarly situated individuals. However, benefits
provided must be uniformly available to all similarly situated
[[Page 75015]]
individuals. Likewise, any restriction on a benefit or benefits must
apply uniformly to all similarly situated individuals and must not be
directed at individual participants or beneficiaries based on any
health factor of the participants or beneficiaries (determined based on
all the relevant facts and circumstances).
With respect to these benefit rules, the Departments received many
inquiries about HRAs and one comment about nondiscrimination
requirements under other laws. Under HRAs, employees are reimbursed for
medical expenses up to a maximum amount for a period, based on the
employer's contribution to the plan. These plans may or may not be
funded. Another common feature is that the plans typically allow
amounts remaining available at the end of the period to be used to
reimburse medical expenses in later periods. Because the maximum
reimbursement available under a plan to an employee in any single
period may vary based on the claims experience of the employee,
concerns have arisen about the application of the HIPAA
nondiscrimination rules to these plans.
To address these concerns, these final regulations include an
example under which the carryforward of unused employer-provided
medical care reimbursement amounts to later years does not violate the
HIPAA nondiscrimination requirements, even though the maximum
reimbursement amount for a year varies among employees within the same
group of similarly situated individuals based on prior claims
experience. In the example, an employer sponsors a group health plan
under which medical care expenses are reimbursed up to an annual
maximum amount. The maximum reimbursement amount with respect to an
employee for a year is a uniform amount multiplied by the number of
years the employee has participated in the plan, reduced by the total
reimbursements for prior years. Because employees who have participated
in the plan for the same length of time are eligible for the same total
benefit over that length of time, the example concludes that the
arrangement does not violate the HIPAA nondiscrimination requirements.
The Equal Employment Opportunity Commission (EEOC) asked the
Departments to clarify that certain plan practices or provisions
permitted under the benefits paragraphs of the 2001 interim rules may
violate the Americans with Disabilities Act of 1990 (ADA) or Title VII
of the Civil Rights Act of 1964 (Title VII). Specifically, the 2001
interim rules allow plans to exclude or limit benefits for certain
types of conditions or treatments. The EEOC commented that, if such a
benefit limit were applied to AIDS, it would be a disability-based
distinction that violates the ADA (unless it is permitted under section
501(c) of the ADA). In addition, the EEOC commented that an exclusion
from coverage of prescription contraceptives, but not of other
preventive treatments, would violate Title VII because prescription
contraceptives are used exclusively by women.
Paragraph (h) of the 2001 interim rules and these final regulations
is entitled ``No effect on other laws.'' This section clarifies that
compliance with the nondiscrimination rules is not determinative of
compliance with any other provision of ERISA, or any other State or
Federal law, including the ADA. Moreover, in paragraph (b) of the 2001
interim rules and these final regulations, the general rule governing
the application of the nondiscrimination rules to benefits clarifies
that whether any plan provision or practice with respect to benefits
complies with these rules does not affect whether the provision or
practice is permitted under any other provision of the Code, ERISA, or
the PHS Act, the Americans with Disabilities Act, or any other law,
whether State or Federal.
Many other laws may regulate plans and issuers in their provision
of benefits to participants and beneficiaries. These laws include the
ADA, Title VII, the Family and Medical Leave Act, ERISA's fiduciary
provisions, and State law. The Departments have not attempted to
summarize the requirements of those laws in the HIPAA nondiscrimination
rules. Instead, these rules clarify the application of the HIPAA
nondiscrimination rules to group health plans, which may permit certain
practices that other laws prohibit. Nonetheless, to avoid misleading
plans and issuers as to the permissibility of any plan provision under
other laws, the Departments included, in both paragraph (h) and
paragraph (b) of the regulations, references to the potential
applicability of other laws. Employers, plans, issuers, and other
service providers should consider the applicability of these laws to
their coverage and contact legal counsel or other government agencies
such as the EEOC and State insurance departments if they have questions
under those laws.
Source-of-Injury Exclusions
Some plans and issuers, while generally providing coverage for the
treatment of an injury, deny benefits if the injury arose from a
specified cause or activity. These kinds of exclusions are known as
source-of-injury exclusions. Under the 2001 interim rules, if a plan or
issuer provides benefits for a particular injury, it may not deny
benefits otherwise provided for treatment of the injury due to the fact
that the injury results from a medical condition or an act of domestic
violence. Two examples in the 2001 interim rules illustrate the
application of this rule, to injuries resulting from an attempted
suicide due to depression and to injuries resulting from bungee
jumping.
These final regulations retain the provisions in the 2001 interim
rules and add a clarification. Some people have inquired if a suicide
exclusion can apply if an individual had not been diagnosed with a
medical condition such as depression before the suicide attempt. These
final regulations clarify that benefits may not be denied for injuries
resulting from a medical condition even if the medical condition was
not diagnosed before the injury.
Some comments expressed concern that the discussion of the source-
of-injury rule in the 2001 interim rules might be used to support the
use of vague language to identify plan benefit exclusions, especially
to identify source-of-injury exclusions. Requirements for plan benefit
descriptions are generally outside of the scope of these regulations.
Nonetheless, Department of Labor regulations at 29 CFR 2520.102-2(b)
provide, ``The format of the summary plan description must not have the
effect of misleading, misinforming or failing to inform participants
and beneficiaries. Any description of exception, limitations,
reductions, and other restrictions of plan benefits shall not be
minimized, rendered obscure or otherwise made to appear unimportant * *
* The advantages and disadvantages of the plan shall be presented
without either exaggerating the benefits or minimizing the
limitations.'' State laws governing group insurance or nonfederal
governmental plans may provide additional protections.
The Departments received thousands of comments protesting that the
source-of-injury provisions in the 2001 interim rules would generally
permit plans or issuers to exclude benefits for the treatment of
injuries sustained in the activities listed in the conference report to
HIPAA (motorcycling, snowmobiling, all-terrain vehicle riding,
horseback riding, skiing, and other similar activities). Many comments
requested that the source-of-injury rule be amended to provide that a
source-of-injury exclusion could not apply if the
[[Page 75016]]
injury resulted from (in addition to an act of domestic violence or a
medical condition) participation in legal recreational activities such
as those listed in the conference report. Some comments expressed the
concern that the rule in the 2001 interim rules would cause plans and
issuers to begin excluding benefits for treatment of injuries sustained
in these kinds of activities.
One comment generally supported the position in the 2001 interim
rules. That comment expressed the belief that Congress intended with
this issue, as with many other issues, to continue its longstanding
deference to the States on the regulation of benefit design under
health insurance. The comment also noted that the source-of-injury rule
in the 2001 interim rules would not change the practice of plans or
issuers with regard to the activities listed in the conference report
and that the practice of plans and issuers in this regard would
continue to be governed, as they had been before HIPAA, by market
conditions and the States.
The Departments have not added the list of activities from the
conference report to the source-of-injury rule in the final
regulations. The statute itself is unclear about how benefits in
general are affected by the nondiscrimination requirements and is
silent with respect to source-of-injury exclusions in particular. The
legislative history provides that the inclusion of evidence of
insurability in the list of health factors is intended to ensure, among
other things, that individuals are not excluded from health care
coverage due to their participation in the activities listed in the
conference report. This language is unclear because the term ``health
care coverage'' could mean only eligibility to enroll for coverage
under the plan, so that people who participate in the activities listed
in the conference report could not be kept out of the plan but could be
denied benefits for injuries sustained in those activities.
Alternatively, it could mean eligibility both to enroll for coverage
and for benefits, so that people who participate in those activities
could not be kept out of the plan or denied benefits for injuries
sustained in those activities. Without any indication in the statute
and without a clear indication in the legislative history about this
issue, and in light of the overall scheme of the statute, the
Departments have made no changes to the regulations.
Moreover, to the extent not prohibited by State law, plans and
issuers have been free to impose source-of-injury exclusions since
before HIPAA. There is no reason to believe that plans and issuers will
begin to impose source-of-injury exclusions with respect to the
conference report activities merely because such exclusions are not
prohibited under the 2001 interim rules and these final regulations.
Relationship of Prohibition on Nonconfinement Clauses to State
Extension-of-Benefits Laws
Questions have arisen about the relationship of the prohibition on
nonconfinement clauses in the 2001 interim rules to State extension-of-
benefits laws. Plan provisions that deny an individual benefits based
on the individual's confinement to a hospital or other health care
institution at the time coverage would otherwise become effective are
often called nonconfinement clauses. The 2001 interim rules prohibit
such nonconfinement clauses. At the same time, many States require
issuers to provide benefits beyond the date on which coverage under the
policy would otherwise have ended to individuals who continue to be
hospitalized beyond that date. Example 2 in the 2001 interim rules
illustrated that a current issuer cannot impose a nonconfinement clause
that restricts benefits for an individual based on whether that
individual is entitled to continued benefits from a prior issuer
pursuant to a State law requirement. The final sentence in Example 2
provided that HIPAA does not affect the prior issuer's obligation under
State law and does not affect any State law governing coordination of
benefits.
Under the laws of some States, a prior issuer has the obligation to
provide health benefits to an individual confined to a hospital beyond
the nominal end of the policy only if the hospitalization is not
covered by a succeeding issuer. Because HIPAA requires a succeeding
issuer to provide benefits that it would otherwise provide if not for
the nonconfinement clause, in such a case State law would not require
the prior issuer to provide benefits for a confinement beyond the
nominal end of the policy. In this context, the statement in the final
sentence of Example 2--that HIPAA does not affect the prior issuer's
obligation under State law--could be read to conflict with the text of
the rule and the main point of Example 2 that the succeeding issuer
must cover the confinement.
There has been some dispute about how this potential ambiguity
should be resolved. One interpretation is that the succeeding issuer
can never impose a nonconfinement clause, and if this has the effect
under State law of not requiring the prior issuer to provide benefits
beyond the nominal end of the policy, then the prior issuer is not
obligated to provide the extended benefits. This interpretation is
consistent with the text of the nonconfinement rule and the main point
of Example 2, though it could be read to conflict with the last
sentence in Example 2.
Another interpretation proposed by some is that, consistent with
the last sentence of Example 2, the obligation of a prior issuer is
never affected by the HIPAA prohibition against nonconfinement clauses.
Under this interpretation, if a State law conditions a prior issuer's
obligation on there being no succeeding issuer with the obligation,
then in order to leave the prior issuer's obligation unaffected under
State law, the succeeding issuer could apply a nonconfinement clause
and the HIPAA prohibition would not apply. This interpretation elevates
a minor clarification at the end of an example to supersede not only
the main point of the example but also the express text of the rule the
example illustrates. This proposed interpretation is clearly contrary
to the intent of the 2001 interim rules.
To avoid other interpretations, these final rules have replaced the
final sentence of Example 2 in the 2001 interim rules with three
sentences. The new language clarifies that: State law cannot change the
succeeding issuer's obligation under HIPAA; a prior issuer may also
have an obligation; and in a case in which a succeeding issuer has an
obligation under HIPAA and a prior issuer has an obligation under State
law to provide benefits for a confinement, any State laws designed to
prevent more than 100 percent reimbursement, such as State
coordination-of-benefits laws, continue to apply. Thus, under HIPAA a
succeeding issuer cannot deny benefits to an individual on the basis of
a nonconfinement clause. If this requirement under HIPAA has the effect
under State law of removing a prior issuer's obligation to provide
benefits, then the prior issuer is not obligated to provide benefits
for the confinement. If under State law this requirement under HIPAA
has the effect of obligating both the prior issuer and the succeeding
issuer to provide benefits, then any State coordination-of-benefits law
that is used to determine the order of payment and to prevent more than
100 percent reimbursement continues to apply.
Actively-at-Work Rules and Employer Leave Policies
The final regulations make no changes to the 2001 interim rules
relating to actively-at-work provisions. Actively-at-
[[Page 75017]]
work clauses are generally prohibited, unless individuals who are
absent from work due to any health factor are treated, for purposes of
health coverage, as if they are actively at work. Nonetheless, a plan
or issuer may distinguish between groups of similarly situated
individuals (provided the distinction is not directed at individual
participants or beneficiaries based on a health factor). Examples in
the regulations illustrate that a plan or issuer may condition coverage
on an individual's meeting the plan's requirement of working full-time
(such as a minimum of 250 hours in a three-month period or 30 hours per
week).
Several members of the regulated community have asked the
Departments to clarify the applicability of the actively-at-work rules
to various plan provisions that require an individual to perform a
minimum amount of service per week in order to be eligible for
coverage. It is the Departments' experience that much of the complexity
in applying these rules derives from the myriad variations in the
operation of employers' leave policies. The Departments believe that
the 2001 interim rules provide adequate principles for applying the
actively-at-work provisions to different types of eligibility
provisions. In order to comply with these rules, a plan or issuer
should apply the plan's service requirements consistently to all
similarly situated employees eligible for coverage under the plan
without regard to whether an employee is seeking eligibility to enroll
in the plan or continued eligibility to remain in the plan.
Accordingly, if a plan imposes a 30-hour-per-week requirement and
treats employees on paid leave (including sick leave and vacation
leave) who are already in the plan as if they are actively-at-work, the
plan generally is required to credit time on paid leave towards
satisfying the 30-hour-per-week requirement for employees seeking
enrollment in the plan. Similarly, if a plan allowed employees to
continue eligibility under the plan while on paid leave and for an
additional period of 30 days while on unpaid leave, the plan is
generally required to credit these same periods for employees seeking
enrollment in the plan.\1\ To help ensure consistency in application,
plans and issuers may wish to clarify, in writing, how employees on
various types of leave are treated for purposes of interpreting a
service requirement. Without clear plan rules, plans and issuers might
slip into inconsistent applications of their rules, which could lead to
violations of the actively-at-work provisions.
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\1\ These nondiscrimination rules do not address the
applicability of the Family and Medical Leave Act to employers or
group health coverage.
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Wellness Programs
The HIPAA nondiscrimination provisions do not prevent a plan or
issuer from establishing discounts or rebates or modifying otherwise
applicable copayments or deductibles in return for adherence to
programs of health promotion and disease prevention. The 1997 interim
rules refer to these programs as ``bona fide wellness programs.'' In
the preamble to the 1997 interim rules, the Departments invited
comments on whether additional guidance was needed concerning, among
other things, the permissible standards for determining bona fide
wellness programs. The Departments also stated their intent to issue
further regulations on the nondiscrimination requirements and that in
no event would the Departments take any enforcement action against a
plan or issuer that had sought to comply in good faith with section
9802 of the Code, section 702 of ERISA, and section 2702 of the PHS Act
before the publication of additional guidance. The preambles to the
2001 interim final and proposed rules noted that the period for
nonenforcement in cases of good faith compliance with the HIPAA
nondiscrimination provisions generally ended on the applicability date
of those regulations but continued with respect to wellness programs
until the issuance of further guidance. Accordingly, the nonenforcement
policy of the Departments ends upon the applicability date of these
final regulations for cases in which a plan or issuer fails to comply
with the regulations but complies in good faith with an otherwise
reasonable interpretation of the statute.
The HIPAA nondiscrimination provisions generally prohibit a plan or
issuer from charging similarly situated individuals different premiums
or contributions based on a health factor. These final regulations also
generally prohibit a plan or issuer from requiring similarly situated
individuals to satisfy differing deductible, copayment, or other cost-
sharing requirements. However, the HIPAA nondiscrimination provisions
do not prevent a plan or issuer from establishing premium discounts or
rebates or modifying otherwise applicable copayments or deductibles in
return for adherence to programs of health promotion and disease
prevention. Thus, there is an exception to the general rule prohibiting
discrimination based on a health factor if the reward, such as a
premium discount or waiver of a cost-sharing requirement, is based on
participation in a program of health promotion or disease prevention.
Both the 1997 interim rules and the 2001 proposed regulations refer
to programs of health promotion and disease prevention allowed under
this exception as ``bona fide wellness programs.'' These regulations
generally adopt the provisions in the 2001 proposed rules. However, as
more fully explained below, the final regulations no longer use the
term ``bona fide'' in connection with wellness programs, add a
description of wellness programs that do not have to satisfy additional
requirements in order to comply with the nondiscrimination
requirements, reorganize the four requirements from the proposed rules
into five requirements, provide that the reward for a wellness
program--coupled with the reward for other wellness programs with
respect to the plan that require satisfaction of a standard related to
a health factor--must not exceed 20% of the total cost of coverage
under the plan, and add examples and make other changes to more
accurately describe how the requirements apply.
The term ``wellness program''. Comments suggested that the use of
the term ``bona fide'' with respect to wellness programs was confusing
because, under the proposed rules, some wellness programs that are not
``bona fide'' within the narrow meaning of that term in the proposed
rules nonetheless satisfy the HIPAA nondiscrimination requirements. To
address this concern, these final regulations do not use the term
``bona fide wellness program.'' Instead the final regulations treat all
programs of health promotion or disease prevention as wellness programs
and specify which of those wellness programs must satisfy additional
standards to comply with the nondiscrimination requirements.
Programs not subject to additional standards. The preamble to the
2001 proposed rules described a number of wellness programs that comply
with the HIPAA nondiscrimination requirements without having to satisfy
any additional standards. However, the text of the regulation did not
make such a distinction. The Departments have received many comments
and inquiries about whether programs like those described in the 2001
preamble would have to satisfy the additional standards in the proposed
rules. As a result, a paragraph has been added to the final regulations
defining and illustrating programs that comply with the
nondiscrimination requirements without having to satisfy any additional
[[Page 75018]]
standards (assuming participation in the program is made available to
all similarly situated individuals). Such programs are those under
which none of the conditions for obtaining a reward is based on an
individual satisfying a standard related to a health factor or under
which no reward is offered. The final regulations include the following
list to illustrate the wide range of programs that would not have to
satisfy any additional standards to comply with the nondiscrimination
requirements:
A program that reimburses all or part of the cost for
memberships 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 copayment or deductible requirement under a group health
plan for the costs of, for example, 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.
Only programs under which any of the conditions for obtaining a
reward is based on an individual satisfying a standard related to a
health factor must meet the five additional requirements described in
paragraph (f)(2) of these regulations in order to comply with the
nondiscrimination requirements.
Limit on the reward. As under the proposed rules, the total reward
that may be given to an individual under the plan for all wellness
programs is limited. A reward can be in the form of a discount or
rebate of a premium or contribution, a waiver of all or part of a cost-
sharing mechanism (such as deductibles, copayments, or coinsurance),
the absence of a surcharge, or the value of a benefit that would
otherwise not be provided under the plan. Under the proposed rule, the
reward for the wellness program, coupled with the reward for other
wellness programs with respect to the plan that require satisfaction of
a standard related to a health factor, must not exceed a specified
percentage of the cost of employee-only coverage under the plan. The
cost of employee-only coverage is determined based on the total amount
of employer and employee contributions for the benefit package under
which the employee is receiving coverage.
Comments indicated that in some circumstances dependents are
permitted to participate in the wellness program in addition to the
employee and that in those circumstances the reward should be higher to
reflect dependent participation in the program. These final regulations
provide that if, in addition to employees, any class of dependents
(such as spouses or spouses and dependent children) may 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.
The proposed regulations specified three alternative percentages:
10, 15, and 20. The final regulations provide that the amount of the
reward may not exceed 20 percent of the cost of coverage. The proposed
regulations solicited comments on the appropriate percentage. The
percentage limit is designed to avoid a reward or penalty being 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. Comments from one
employer and two national insurance industry associations requested
that the level of the percentage for rewards should provide plans and
issuers maximum flexibility for designing wellness programs. Comments
suggested that plans and issuers have a greater opportunity to
encourage healthy behaviors through programs of health promotion and
disease prevention if they are allowed flexibility in designing such
programs. The 20 percent limit on the size of the reward in the final
regulations allows plans and issuers to maintain flexibility in their
ability to design wellness programs, while avoiding rewards or
penalties so large as to deny coverage or create too heavy a financial
penalty on individuals who do not satisfy an initial wellness program
standard that is related to a health factor.
Reasonably-designed and at-least-once-per-year requirements. In the
2001 proposed rules, the second of four requirements was that the
program must be reasonably designed to promote good health or prevent
disease. The regulations also provided that a program did not meet this
standard unless it gave individuals eligible for the program the
opportunity to qualify for the reward at least once per year.
One comment suggested a safe harbor under which a wellness program
that allows individuals to qualify at least once a year for the reward
under the program would satisfy the ``reasonably designed'' standard
without regard to other attributes of the program. The Departments have
not adopted this suggestion. The ``reasonably designed'' standard is a
broad standard. A wide range of factors could affect the reasonableness
of the design of a wellness program, not just the frequency with which
a participant could qualify for the reward. For example, a program
might not be reasonably designed to promote good health or prevent
disease if it imposed, as a condition to obtaining the reward, an
overly burdensome time commitment or a requirement to engage in illegal
behavior. The once-per-year requirement was included in the proposed
rules merely as a bright-line standard for determining the minimum
frequency that is consistent with a reasonable design for promoting
good health or preventing disease. Thus, this second requirement of the
proposed rules has been divided into two requirements in the final
rules (the second and the third requirements). This division was made
to emphasize that a program that must satisfy the additional standards
in order to comply with the nondiscrimination requirements must allow
eligible individuals to qualify for the reward at least once per year
and must also be otherwise reasonably designed to promote health or
prevent disease.
Comments also expressed other concerns about the ``reasonably
designed'' requirement. While acknowledging that this standard provides
significant flexibility, these comments were concerned that this
flexible approach might also require substantial resources in
evaluating all the facts and circumstances of a proposed program to
determine whether it was reasonable in its design.
The ``reasonably designed'' requirement is intended to be an easy
standard to satisfy. To make this clear, the final regulations have
added language providing that if a program has a reasonable chance of
improving the health of participants 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 health or prevent
disease, it satisfies this standard. There does not need to be a
scientific record that the method promotes wellness to satisfy this
standard. The standard is intended to allow experimentation in diverse
ways of promoting wellness. For example, a plan or issuer could satisfy
this standard by providing rewards to individuals who participated in a
course of aromatherapy. The requirement of reasonableness in this
standard prohibits bizarre, extreme, or illegal requirements in a
wellness program.
[[Page 75019]]
One comment requested that the final regulations set forth one or
more safe harbors that would demonstrate compliance with the
``reasonably designed'' standard. The examples in the proposed and
final regulations present a range of wellness programs that are well
within the borders of what is considered reasonably designed to promote
health or prevent disease. The examples serve as safe harbors, so that
a plan or issuer could adopt a program identical to one described as
satisfying the wellness program requirements in the examples and be
assured of satisfying the requirements in the regulations. Wellness
programs similar to the examples also would satisfy the ``reasonably
designed'' requirement. The Departments, though, do not want plans or
issuers to feel constrained by the relatively narrow range of programs
described by the examples but want plans and issuers to feel free to
consider innovative programs for motivating individuals to make efforts
to improve their health.
Reasonable alternative standard. Under the 2001 proposed rules and
these final regulations, a wellness program that provides a reward
requiring satisfaction of a standard related to a health factor must
provide a reasonable alternative standard for obtaining the reward for
certain individuals. This alternative standard must be available for
individuals for whom, for that period, it is unreasonably difficult due
to a medical condition to satisfy the otherwise applicable standard, or
for whom, for that period, it is medically inadvisable to attempt to
satisfy the otherwise applicable standard. A program does not need to
establish the specific reasonable alternative standard before the
program commences. It is sufficient to determine a reasonable
alternative standard once a participant informs the plan that it is
unreasonably difficult for the participant due to a medical condition
to satisfy the general standard (or that it is medically inadvisable
for the participant to attempt to achieve the general standard) under
the program.
Some comments suggested that the requirement to devise and offer
such a reasonable alternative standard potentially creates a
significant burden on plans and issuers. Comments also suggested that
the Departments should define a ``safe harbor'' for what constitutes a
reasonable alternative standard, and that plans and issuers should be
permitted to establish a single alternative standard, rather than
having to tailor a standard for each individual for whom a reasonable
alternative standard must be offered.
The Departments understand that, in devising wellness programs,
plans and issuers strive to improve the health of participating
individuals in a way that is not administratively burdensome or
expensive. Under the proposed and final rules, it is permissible for a
plan or issuer to devise a reasonable alternative standard by lowering
the threshold of the existing health-factor-related standard,
substituting a different standard, or waiving the standard. (For the
alternative standard to be reasonable, the individual must be able to
satisfy it without regard to any health factor.) To address the concern
regarding the potential burden of this requirement, the final
regulations explicitly provide that a plan or issuer can waive the
health-factor-related standard for all individuals for whom a
reasonable alternative standard must be offered. Additionally, the
final regulations include an example demonstrating that a reasonable
alternative standard could include following the recommendations of an
individual's physician regarding the health factor at issue. Thus, a
plan or issuer need not assume the burden of designing a discrete
alternative standard for each individual for whom an alternative
standard must be offered. An example also illustrates that if an
alternative standard is health-factor-related (i.e., walking three days
a week for 20 minutes a day), the wellness program must provide an
additional alternative standard (i.e., following the individual's
physician's recommendations regarding the health factor at issue) to
the appropriate individuals.
The 2001 proposed rules included an example illustrating a smoking
cessation program. Comments expressed concern that, under the proposed
regulations, individuals addicted to nicotine who comply with a
reasonable alternative standard year after year would always be
entitled to the reward even if they did not quit using tobacco.
Comments questioned whether this result is consistent with the goal of
promoting wellness. The final regulations retain the example from the
proposed rules. Comments noted that overcoming an addiction sometimes
requires a cycle of failure and renewed effort. For those individuals
for whom it remains unreasonably difficult due to an addiction, a
reasonable alternative standard must continue to be offered. Plans and
issuers can accommodate this health factor by continuing to offer the
same or a new reasonable alternative standard. For example, a plan or
issuer using a smoking cessation class might use different classes from
year to year or might change from using a class to providing nicotine
replacement therapy. These final regulations provide an additional
example of a reasonable alternative standard of viewing, over a period
of 12 months, a 12-hour video series on health problems associated with
tobacco use.
Concern has been expressed that individuals might claim that it
would be unreasonably difficult or medically inadvisable to meet the
wellness program standard, when in fact the individual could meet the
standard. The final rules clarify that plans may seek verification,
such as a statement from a physician, that a health factor makes it
unreasonably difficult or medically inadvisable for an individual to
meet a standard.
Disclosure requirements. The fifth requirement for a wellness
program that provides a reward requiring satisfaction of a standard
related to a health factor is that all plan materials describing the
terms of the program must disclose the availability of a reasonable
alternative standard. This requirement is unchanged from the proposed
rules. The 2001 proposed rules and these final regulations include the
same model language that can be used to satisfy this requirement;
examples also illustrate substantially similar language that would
satisfy the requirement.
The final regulations retain the two clarifications of this
requirement. First, plan materials are not required to describe
specific reasonable alternative standards. It is sufficient to disclose
that some reasonable alternative standard will be made available.
Second, any plan materials that describe the general standard would
also have to disclose the availability of a reasonable alternative
standard. However, if the program is merely mentioned (and does not
describe the general standard), disclosure of the availability of a
reasonable alternative standard is not required.
Special Rule for Self-Funded Nonfederal Governmental Plans Exempted
Under 45 CFR 146.180
The sponsor of a self-funded nonfederal governmental plan may elect
under section 2721(b)(2) of the PHS Act and 45 CFR 146.180 to exempt
its group health plan from the nondiscrimination requirements of
section 2702 of the PHS Act and 45 CFR 146.121. Under the interim final
nondiscrimination rules, if the plan sponsor subsequently chooses to
bring the plan into compliance with the nondiscrimination requirements,
the plan must provide notice to that effect to individuals who were
denied
[[Page 75020]]
enrollment based on one or more health factors, and afford those
individuals an opportunity, that continues for at least 30 days, to
enroll in the plan. (An individual is considered to have been denied
coverage if he or she failed to apply for coverage because, given an
exemption election under 45 CFR 146.180, it was reasonable to believe
that an application for coverage would have been denied based on a
health factor). The notice must specify the effective date of
compliance, and inform the individual regarding any enrollment
restrictions that may apply under the terms of the plan once the plan
comes into compliance. The plan may not treat the individual as a late
enrollee or a special enrollee. These final regulations retain this
transitional rule, and state that the plan must permit coverage to be
effective as of the first day of plan coverage for which an exemption
election under 45 CFR 146.180 (with regard to the nondiscrimination
requirements) is no longer in effect. (These final regulations delete
the reference giving the plan the option of having the coverage start
July 1, 2001, because that option implicated the expired transitional
rules regarding individuals who were denied coverage based on a health
factor prior to the applicability of the 2001 interim rules. As
previously stated, those transitional rules have not been republished
in these final regulations.) Additionally, the examples illustrating
how the special rule for nonfederal governmental plans operates have
been revised slightly.
Applicability Date
These regulations apply for plan years beginning on or after July
1, 2007. Until the applicability date for this regulation, plans and
issuers are required to comply with the corresponding sections of the
regulations previously published in the Federal Register (66 FR 1378)
and other applicable regulations.
III. Economic Impact and Paperwork Burden
Summary--Department of Labor and Department of Health and Human
Services
HIPAA's nondiscrimination provisions generally prohibit group
health plans and group health insurance issuers from discriminating
against individuals in eligibility or premiums on the basis of health
factors. The Departments have crafted these regulations to secure the
protections from discrimination as intended by Congress in as
economically efficient a manner as possible, and believe that the
economic benefits of the regulations justify their costs.
The primary economic benefits associated with securing HIPAA's
nondiscrimination provisions derive from increased access to affordable
group health plan coverage for individuals with health problems.
Increased access benefits both newly-covered individuals and society at
large. It fosters expanded health coverage, timelier and more complete
medical care, better health outcomes, and improved productivity and
quality of life. This is especially true for the individuals most
affected by HIPAA's nondiscrimination provisions--those with adverse
health conditions. Denied health coverage, individuals in poorer health
are more likely to suffer economic hardship, to forego badly needed
care for financial reasons, and to suffer adverse health outcomes as a
result. For them, gaining health coverage is more likely to mean
gaining economic security, receiving timely, quality care, and living
healthier, more productive lives. Similarly, participation by these
individuals in wellness programs fosters better health outcomes,
increases productivity and quality of life, and has the same outcome in
terms of overall gains in economic security. The wellness provisions of
these regulations will result in fewer instances in which wellness
programs shift costs to high-risk individuals, and more instances in
which these individuals succeed at improving health habits and health.
Additional economic benefits derive directly from the improved
clarity provided by the regulations. The regulations will reduce
uncertainty and costly disputes and promote confidence in health
benefits' value, thereby improving labor market efficiency and
fostering the establishment and continuation of group health plans and
their wellness program provisions.
The Departments estimate that the dollar value of the expanded
coverage attributable to HIPAA's nondiscrimination provisions is
approximately $850 million annually. The Departments believe that the
cost of HIPAA's nondiscrimination provisions is borne by covered
workers. Costs can be shifted to workers through increases in employee
premium shares or reductions (or smaller increases) in pay or other
components of compensation, by increases in deductibles or other cost
sharing, or by reducing the richness of health benefits. Whereas the
benefits of the nondiscrimination provisions are concentrated in a
relatively small population, the costs are distributed broadly across
plans and enrollees.
The proposed rules on wellness programs impose certain requirements
on wellness programs providing rewards that would otherwise
discriminate based on a health factor in order to ensure that the
exception for wellness programs does not eviscerate the general rule
contained in HIPAA's nondiscrimination provisions. Costs associated
with the wellness program provisions are justified by the benefits
received by those individuals now able, through alternative standards,
to participate in such programs. Because the new provisions limit
rewards for wellness programs that require an individual to satisfy a
standard related to a health factor to 20 percent of the cost of single
coverage (with additional provisions related to rewards that apply also
to classes of dependents), some rewards will be reduced and this
reduction might compel some individuals to decline coverage. The number
of individuals affected, however, is thought to be small. Moreover, the
Departments estimate that the cost of the reduction in rewards that
would exceed the limit will amount to only $6 million. Establishing
reasonable alternative standards, which should increase coverage for
those now eligible for discounts as well as their participation in
programs designed to promote health or prevent disease, is expected to
cost between $2 million to $9 million. The total costs should therefore
fall within a range between $8 million and $15 million annually.
New economic costs may be also incurred in connection with the
wellness provisions if reductions in rewards result in the reduction of
wellness programs' effectiveness, but this effect is expected to be
very small. Other new economic costs may be incurred by plan sponsors
to make available reasonable alternative standards where required. The
Departments are unable to estimate these costs due to the variety of
options available to plan sponsors for bringing wellness programs into
compliance with these rules.
Executive Order 12866--Department of Labor and Department of Health and
Human Services
Under Executive Order 12866, the Departments must determine whether
a regulatory action is ``significant'' and therefore subject to the
requirements of the Executive Order and subject to review by the Office
of Management and Budget (OMB). Under section 3(f), the order defines a
``significant regulatory action'' as an action that is likely to result
in a rule (1) having an annual effect on the economy of $100 million
[[Page 75021]]
or more, or adversely and materially affecting a sector of the economy,
productivity, competition, jobs, the environment, public health or
safety, or State, local or tribal governments or communities (also
referred to as ``economically significant''); (2) creating serious
inconsistency or otherwise interfering with an action taken or planned
by another agency; (3) materially altering the budgetary impacts of
entitlement grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raising novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in the Executive Order.
Pursuant to the terms of the Executive Order, this action is
``economically significant'' and subject to OMB review under Section
3(f) of the Executive Order. Consistent with the Executive Order, the
Departments have assessed the costs and benefits of this regulatory
action. The Departments performed a comprehensive, unified analysis to
estimate the costs and benefits attributable to the final regulations
for purposes of compliance with the Executive Order 12866, the
Regulatory Flexibility Act, and the Paperwork Reduction Act. The
Departments' analyses and underlying assumptions are detailed below.
The Departments believe that the benefits of the final regulations
justify their costs.
Regulatory Flexibility Act--Department of Labor and Department of
Health and Human Services
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to federal rules that are subject to
the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551 et seq.) and likely to have
a significant economic impact on a substantial number of small
entities. Unless an agency certifies that a final rule will not have a
significant economic impact on a substantial number of small entities,
section 604 of the RFA requires that the agency present a final
regulatory flexibility analysis (FRFA) at the time of the publication
of the notice of final rulemaking describing the impact of the rule on
small entities. Small entities include small businesses, organizations,
and governmental jurisdictions.
Because the 2001 interim rules were issued as final rules and not
as a notice of proposed rulemaking, the RFA did not apply and the
Departments were not required to either certify that the rule would not
have a significant impact on a substantial number of small entities or
conduct a regulatory flexibility analysis. The Departments nonetheless
crafted those regulations in careful consideration of effects on small
entities, and conducted an analysis of the likely impact of the rules
on small entities. This analysis was detailed in the preamble to the
interim final rule.
The Departments also conducted an initial regulatory flexibility
analysis in connection with the proposed regulations on wellness
programs and present here a FRFA with respect to the final regulations
on wellness programs pursuant to section 604 of the RFA. For purposes
of their unified FRFA, the Departments adhered to EBSA's proposed
definition of small entities. The Departments consider a small entity
to be an employee benefit plan with fewer than 100 participants. The
basis of this definition is found in section 104(a)(2) of ERISA, which
permits the Secretary of Labor to prescribe simplified annual reports
for pension plans that cover fewer than 100 participants. The
Departments believe that assessing the impact of this final rule on
small plans is an appropriate substitute for evaluating the effect on
small entities as that term is defined in the RFA. This definition of
small entity differs, however, from the definition of small business
based on standards promulgated by the Small Business Administration (13
CFR 121.201) pursuant to the Small Business Act (15 U.S.C. 631 et
seq.). Because of this difference, the Departments requested comments
on the appropriateness of this size standard for evaluating the impact
of the proposed regulations on small entities. No comments were
received.
The Departments estimate that 35,000 plans with fewer than 100
participants vary employee premium contributions or cost-sharing across
similarly situated individuals based on health factors.\2\ While this
represents just one percent of all small plans, the Departments believe
that because of the large number of plans, this may constitute a
substantial number of small entities. The Departments also note that at
least some premium rewards may be large. Premium discounts associated
with wellness programs are believed to range as high as $920 per
affected participant per year. Therefore, the Departments believe that
the impact of this regulation on at least some small entities may be
significant.
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\2\ Based on tabulations of the 2003 Medical Expenditure Panel
Survey Insurance Component (MEPS-IC) and 1997 Survey of Government
Finances (SGF), the Departments estimate that roughly 2.4 million
small health plans exist. Of these, 1.2 percent of these plans are
believed to vary premiums (as suggested in a 1993 study by the
Robert Woods Johnson Foundation) while .5 percent are thought to
vary benefits (as suggested in, Spec Summary. United States Salaried
Managed Health/Health Promotion Initiatives, 2003-2004, Hewitt
Associates, July, 2003.). Assuming that half of those that vary
premiums also vary benefits, the Departments conclude that 1.5
percent of all small plans are potentially affected by the statute.
---------------------------------------------------------------------------
Under these final regulations on wellness programs, such programs
are not subject to additional requirements if none of the conditions
for obtaining a reward is based on an individual satisfying a standard
that is related to a health factor (or if a wellness program does not
provide a reward).
Where a condition for obtaining a reward is based on an individual
satisfying a standard related to a health factor, the wellness program
will not violate the nondiscrimination provisions if additional
requirements are met. The first requirement limits the maximum
allowable reward or total of rewards to a maximum of 20 percent of the
cost of employee-only coverage under the plan (with additional
provisions related to rewards that apply also to classes of
dependents). The magnitude of the limit is intended to offer plans
maximum flexibility while avoiding the effect of denying coverage or
creating an excessive financial penalty for individuals who cannot
satisfy the initial standard based on a health factor.
The Departments estimate that 4,000 small plans and 22,000 small
plan participants will be affected by this limit.\3\ These plans can
comply with this requirement by reducing the discount to the regulated
maximum. This will result in an increase in premiums (or decrease in
cost-sharing) by about $1.3 million on aggregate for those participants
receiving qualified premium discounts \4\ This constitutes an ongoing,
annual cost of $338 on average per affected plan. The regulation does
not limit small plans' flexibility to shift this cost to all
participants in the form
[[Page 75022]]
of small premium increases or benefit cuts.
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\3\ Simulations run by the Departments suggest that 10.7 percent
of all plans exceed the capped premium discount. For the purposes of
this analysis, it was assumed that the affected plans were
proportionally distributed between large and small plans. However,
it is likely that larger plans would have more generous welfare
programs and therefore, this estimate is likely an upper bound.
\4\ Estimate is based on the 2003-04 Hewitt Study and various
measures of the general health of the labor force suggest that
roughly 30 percent of health plan participants will not qualify for
the discount. While plans exceeding the capped discount could meet
the statutes requirements by transferring the excess amount, on
average $57, to the non-qualifying participants, given current
trends in the health insurance industry, it is considered more
likely that plans would instead lower the amount of the discount
given to the 70 percent of participants that qualify. This transfer
would roughly total $1.3 million dollars.
---------------------------------------------------------------------------
The second requirement provides that wellness programs must be
reasonably designed to promote health or prevent disease. Comments
received by the Departments and available literature on employee
wellness programs suggest that existing wellness programs generally
satisfy this requirement. The requirement therefore is not expected to
compel small plans to modify existing wellness programs.
The third requirement is that the program give individuals eligible
for the program the opportunity to qualify for the reward at least once
per year. This provision was included within the terms of the
requirements for reasonable design in the proposed regulations. The
Departments did not anticipate that a cost would arise from the
requirements related to reasonable design when taken together, but
requested comments on their assumptions. Because no comments were
received, the Departments have not attributed a cost to this provision
of the final rule.
The fourth requirement provides that rewards under wellness
programs must be available to all similarly situated individuals.
Rewards are not available to similarly situated individuals unless a
program allows a reasonable alternative standard or waiver of the
applicable standard, if it is unreasonably difficult due to a medical
condition or medically inadvisable to attempt to satisfy the otherwise
applicable standard. The Departments believe that some small plans'
wellness programs do not currently satisfy this requirement and will
have to be modified.
The Departments estimate that 3,000 small plans' wellness programs
include initial standards that may be unreasonably difficult due to a
medical condition or medically inadvisable for some participants to
meet.\5\ These plans are estimated to include 4,000 participants for
whom the standard is in fact unreasonably difficult due to a medical
condition or medically inadvisable to meet.\6\ Satisfaction of
alternative standards by these participants will result in cost
increases for plans as these individuals qualify for discounts or avoid
surcharges. If all of these participants request and then satisfy an
alternative standard, the cost would amount to about $2 million
annually. If one-half request alternative standards and one-half of
those meet them, the cost would be $0.5 million.\7\
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\5\ The 2003-04 Hewitt Survey finds that 9 percent of its
respondents require participants to achieve a certain health
standard to be eligible for discounts. Based on assumptions about
the general health of the labor force, approximately 2.3 percent of
health plan participants may and 1.5 percent will find these
standards difficult to achieve.
\6\ Many small plans are very small, having fewer than 10
participants. Hence, many small plans will include no participant
for whom either of these standards apply.
\7\ Simulations run by the Departments find that the average
premium discount for all health plans after the cap is enforced will
be approximately $450 dollars. This average is then applied to the
upper and lower bounds of those able to pass the alternative
standards in small health plans in order to determine the upper and
lower bound of the transfer cost.
---------------------------------------------------------------------------
In addition to the costs associated with new participants
qualifying for discounts through alternative standards, small plans may
also incur new economic costs by simply providing alternative
standards. However, plans can satisfy this requirement by providing
inexpensive alternative standards and have the flexibility to select
whatever reasonable alternative standard is most desirable or cost
effective. Plans not wishing to provide alternative standards also have
the option of eliminating health status-based variation in employee
premiums or waiving standards for individuals for whom the program
standard is unreasonably difficult due to a medical condition or
medically inadvisable to meet. The Departments expect that the economic
cost to provide alternatives combined with the associated cost of
granting discounts or waiving surcharges will not exceed the cost
associated with granting discounts or waiving surcharges for all
participants who qualify for an alternative. Those costs are estimated
here at $0.5 million to $2 million, or about $160 to $650 per affected
plan. Plans have the flexibility to pass back some or all of this cost
to all participants in the form of small premium increases or benefit
cuts.
The fifth requirement provides that plan materials describing
wellness program standards disclose the availability of reasonable
alternative standards. This requirement will affect the approximately
4,000 small plans that condition rewards on satisfaction of a standard.
These plans will incur economic costs to revise affected plan
materials. The estimated 1,000 to 4,000 small plan participants who
will succeed at satisfying these alternative standards will benefit
from these disclosures. The disclosures need not specify what
alternatives are available unless the plan describes the initial
standard in writing and the regulation provides sample language that
can be used to satisfy this requirement. Legal requirements other than
this regulation generally require plans and issuers to maintain
accurate materials describing plans. Plans and issuers generally update
such materials on a regular basis as part of their normal business
practices. This requirement is expected to represent a negligible
fraction of the ongoing, normal cost of updating plans' materials. This
analysis therefore attributes no cost to this requirement.
Paperwork Reduction Act--Department of Labor and Department of the
Treasury
The 2001 interim rules included an information collection request
(ICR) related to the notice of the opportunity to enroll in a plan
where coverage had been denied based on a health factor before the
effective date of HIPAA. That ICR was approved under OMB control
numbers 1210-0120 and 1545-1728, and was subsequently withdrawn from
OMB inventory because the notice, if applicable, was to have been
provided only once.
The proposed regulations on wellness programs did not include an
information collection request. Like the proposed regulations, the
final regulations include a requirement that, if a plan's wellness
program requires individuals to meet a standard related to a health
factor in order to qualify for a reward and if the plan materials
describe this standard, the materials must also disclose the
availability of a reasonable alternative standard. If plan materials
merely mention that a program is available, the disclosure relating to
alternatives is not required. The regulations include samples of
disclosures that could be used to satisfy the requirements of the final
regulations.
In concluding that the proposed rules did not include an
information collection request, the Departments reasoned that much of
the information required was likely already provided as a result of
state and local mandates or the usual business practices of group
health plans and group health insurance issuers in connection with the
offer and promotion of health care coverage. In addition, the sample
disclosures would enable group health plans to make any modifications
necessary with minimal effort.
Finally, although neither the proposed or final regulations include
a new information collection request, the regulations might have been
interpreted to require a revision to an existing collection of
information. Administrators of group health plans covered under Title I
of ERISA are generally required to make certain disclosures about the
terms of a plan and material changes in terms through a Summary Plan
Description (SPD) or
[[Page 75023]]
Summary of Material Modifications (SMM) pursuant to sections 101(a) and
102(a) of ERISA and related regulations. The ICR related to the SPD and
SMM is currently approved under OMB control number 1210-0039. While
these materials may in some cases require revisions to comply with the
final regulations, the associated burden is expected to be negligible,
and is in fact already accounted for in connection with the SPD and SMM
ICR by a burden estimation methodology that anticipates ongoing
revisions. Therefore, any change to the existing information collection
request arising from these final regulations is not substantive or
material. Accordingly, no application for approval of a revision to the
existing ICR has been made to OMB in connection with these final
regulations.
Paperwork Reduction Act--Department of Health and Human Services
Collection of Information Requirements
Under the Paperwork Reduction Act of 1995, we are required to
provide notice in the Federal Register and solicit public comment
before a collection of information requirement is submitted to the
Office of Management and Budget (OMB) for review and approval. In order
to fairly evaluate whether an information collection should be approved
by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995
requires that we solicit comment on the following issues:
The need for the information collection and its usefulness
in carrying out the proper functions of our agency.
The accuracy of our estimate of the information collection
burden.
The quality, utility, and clarity of the information to be
collected.
Recommendations to minimize the information collection
burden on the affected public, including automated techniques.
Department regulations in 45 CFR 146.121(i)(4) require that if
coverage has been denied to any individual because the sponsor of a
self-funded nonfederal governmental plan has elected under 45 CFR Part
146 to exempt the plan from the requirements of this section, and the
plan sponsor subsequently chooses to bring the plan into compliance,
the plan must: notify the individual that the plan will be coming into
compliance; afford the individual an opportunity to enroll that
continues for at least 30 days, specify the effective date of
compliance; and inform the individual regarding any enrollment
restrictions that may apply once the plan is in compliance.
The burden associated with this requirement was approved by The
Office of Management and Budget (OMB) under OMB control number 0938-
0827, with a current expiration date of April 30, 2009.
In addition, CMS-2078-P, published in the Federal Register on
January 8, 2001 (66 FR 1421) describes the bona fide wellness programs
and specifies their criteria. Section 146.121(f)(1)(iv) further
stipulates that the plan or issuer disclose in all plan materials
describing the terms of the program the availability of a reasonable
alternative standard to qualify for the reward under a wellness
program. However, in plan materials that merely mention that a program
is available, without describing its terms, the disclosure is not
required.
The burden associated with this requirement was approved by OMB
control number 0938-0819, with a current expiration date of April 30,
2009.
Special Analyses--Department of the Treasury
Notwithstanding the determinations of the Departments of Labor and
of Health and Human Services, for purposes of the Department of the
Treasury it has been determined that this Treasury decision is not a
significant regulatory action. Therefore, a regulatory assessment is
not required. It has also been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these regulations, and, because these regulations do not impose a
collection of information on small entities, a Regulatory Flexibility
Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is
not required. Pursuant to section 7805(f) of the Code, the notice of
proposed rulemaking preceding these regulations was submitted to the
Small Business Administration for comment on its impact on small
business.
Congressional Review Act
These final regulations are subject to the Congressional Review Act
provisions of the Small Business Regulatory Enforcement Fairness Act of
1996 (5 U.S.C. 801 et seq.) and have been transmitted to Congress and
the Comptroller General for review. These regulations, however,
constitute a ``major rule,'' as that term is defined in 5 U.S.C. 804,
because they are likely to result in (1) an annual effect on the
economy of $100 million or more; (2) a major increase in costs or
prices for consumers, individual industries, or federal, State or local
government agencies, or geographic regions; or (3) significant adverse
effects on competition, employment, investment, productivity,
innovation, or on the ability of United States-based enterprises to
compete with foreign-based enterprises in domestic or export markets.
Unfunded Mandates Reform Act
For purposes of the Unfunded Mandates Reform Act of 1995 (Pub. L.
104-4), as well as Executive Order 12875, these final regulations do
not include any federal mandate that may result in expenditures by
state, local, or tribal governments, nor does it include mandates which
may impose an annual burden of $100 million or more on the private
sector.
Federalism Statement--Department of Labor and Department of Health and
Human Services
Executive Order 13132 outlines fundamental principles of
federalism, and requires the adherence to specific criteria by federal
agencies in the process of their formulation and implementation of
policies that have ``substantial direct effects'' on the States, the
relationship between the national government and States, or on the
distribution of power and responsibilities among the various levels of
government. Federal agencies promulgating regulations that have these
federalism implications must consult with State and local officials,
and describe the extent of their consultation and the nature of the
concerns of State and local officials in the preamble to the
regulation.
In the Departments' view, these final regulations have federalism
implications, because they have substantial direct effects on the
States, the relationship between the national government and States, or
on the distribution of power and responsibilities among various levels
of government. However, in the Departments' view, the federalism
implications of these final regulations are substantially mitigated
because, with respect to health insurance issuers, the vast majority of
States have enacted laws, which meet or exceed the federal HIPAA
standards prohibiting discrimination based on health factors.
In general, through section 514, ERISA supersedes State laws to the
extent that they relate to any covered employee benefit plan, and
preserves State laws that regulate insurance, banking, or securities.
While ERISA prohibits States from regulating a plan as an insurance or
investment company or bank, HIPAA added a new preemption provision to
ERISA (as well as to the PHS Act) narrowly preempting State
requirements for group health insurance coverage. With respect to the
[[Page 75024]]
HIPAA nondiscrimination provisions, States may continue to apply State
law requirements except to the extent that such requirements prevent
the application of the portability, access, and renewability
requirements of HIPAA, which include HIPAA's nondiscrimination
requirements provisions that are the subject of this rulemaking.
In enacting these new preemption provisions, Congress intended to
preempt State insurance requirements only to the extent that those
requirements prevent the application of the basic protections set forth
in HIPAA. HIPAA's Conference Report states that the conferees intended
the narrowest preemption of State laws with regard to health insurance
issuers. H.R. Conf. Rep. No. 736, 104th Cong. 2d Session 205 (1996).
State insurance laws that are more stringent than the federal
requirements are unlikely to ``prevent the application of'' the HIPAA
nondiscrimination provisions, and be preempted. Accordingly, States
have significant latitude to impose requirements on health insurance
issuers that are more restrictive than the federal law.
Guidance conveying this interpretation was published in the Federal
Register on April 8, 1997. (62 FR 16904) and on December 30, 2004 (62
FR 78720). These final regulations clarify and implement the statute's
minimum standards and do not significantly reduce the discretion given
the States by the statute. Moreover, the Departments understand that
the vast majority of States have requirements that meet or exceed the
minimum requirements of the HIPAA nondiscrimination provisions.
HIPAA provides that the States may enforce the provisions of HIPAA
as they pertain to issuers, but that the Secretary of Health and Human
Services must enforce any provisions that a State fails to
substantially enforce. To date, HHS has had occasion to enforce the
HIPAA nondiscrimination provisions in only two States and currently
enforces the nondiscrimination provisions in only one State in
accordance with that State's specific request to do so. When exercising
its responsibility to enforce provisions of HIPAA, HHS works
cooperatively with the State for the purpose of addressing the State's
concerns and avoiding conflicts with the exercise of State
authority.\8\ HHS has developed procedures to implement its enforcement
responsibilities, and to afford the States the maximum opportunity to
enforce HIPAA's requirements in the first instance. HHS's procedures
address the handling of reports that States may not be enforcing
HIPAA's requirements, and the mechanism for allocating enforcement
responsibility between the States and HHS. In compliance with Executive
Order 13132's requirement that agencies examine closely any policies
that may have federalism implications or limit the policy making
discretion of the States, DOL and HHS have engaged in numerous efforts
to consult with and work cooperatively with affected State and local
officials.
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\8\ This authority applies to insurance issued with respect to
group health plans generally, including plans covering employees of
church organizations. Thus, this discussion of federalism applies to
all group health insurance coverage that is subject to the PHS Act,
including those church plans that provide coverage through a health
insurance issuer (but not to church plans that do not provide
coverage through a health insurance issuer).
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For example, the Departments sought and received input from State
insurance regulators and the National Association of Insurance
Commissioners (NAIC). The NAIC is a non-profit corporation established
by the insurance commissioners of the 50 States, the District of
Columbia, and the four U.S. territories. In most States the Insurance
Commissioner is appointed by the Governor, in approximately 14 States
the insurance commissioner is an elected official. Among other
activities, it provides a forum for the development of uniform policy
when uniformity is appropriate. Its members meet, discuss, and offer
solutions to mutual problems. The NAIC sponsors quarterly meetings to
provide a forum for the exchange of ideas, and in-depth consideration
of insurance issues by regulators, industry representatives, and
consumers. CMS and Department of Labor staff have attended the
quarterly meetings consistently to listen to the concerns of the State
Insurance Departments regarding HIPAA issues, including the
nondiscrimination provisions. In addition to the general discussions,
committee meetings and task groups, the NAIC sponsors the standing CMS/
DOL meeting on HIPAA issues for members during the quarterly
conferences. This meeting provides CMS and the Department of Labor with
the opportunity to provide updates on regulations, bulletins,
enforcement actions and outreach efforts regarding HIPAA.
In addition, the Departments specifically consulted with the NAIC
in developing these final regulations. Through the NAIC, the
Departments sought and received the input of State insurance
departments regarding certain insurance rating practices and late
enrollment issues. The Departments employed the States' insights on
insurance rating practices in developing the provisions prohibiting
``list-billing,'' and their experience with late enrollment in crafting
the regulatory provision clarifying the relationship between the
nondiscrimination provisions and late enrollment. Specifically, the
regulations clarify that while late enrollment, if offered by a plan,
must be available to all similarly situated individuals regardless of
any health factor, an individual's status as a late enrollee is not
itself within the scope of any health factor.
The Departments have also cooperated with the States in several
ongoing outreach initiatives, through which information on HIPAA is
shared among federal regulators, State regulators, and the regulated
community. In particular, the Department of Labor has established a
Health Benefits Education Campaign with more than 70 partners,
including CMS, the NAIC and many business and consumer groups. CMS has
sponsored conferences with the States--the Consumer Outreach and
Advocacy conferences in March 1999 and June 2000 and the Implementation
and Enforcement of HIPAA National State-federal Conferences in August
1999, 2000, 2001, 2002, and 2003. Furthermore, both the Department of
Labor and CMS Web sites offer links to important State Web sites and
other resources, facilitating coordination between the State and
federal regulators and the regulated community.
Throughout the process of developing these regulations, to the
extent feasible within the specific preemption provisions of HIPAA, the
Departments have attempted to balance the States' interests in
regulating health insurance issuers, and Congress's intent to provide
uniform minimum protections to consumers in every State. By doing so,
it is the Departments' view that they have complied with the
requirements of Executive Order 13132.
Pursuant to the requirements set forth in section 8(a) of Executive
Order 13132, and by the signatures affixed to these regulations, the
Departments certify that the Employee Benefits Security Administration
and the Centers for Medicare & Medicaid Services have complied with the
requirements of Executive Order 13132 for the attached final
regulation, Final Rules for Nondiscrimination in Health Coverage in the
Group Market (RIN 1210-AA77 and RIN 0938-AI08), in a meaningful and
timely manner.
[[Page 75025]]
Unified Analysis of Costs and Benefits
1. Introduction
HIPAA's nondiscrimination provisions generally prohibit group
health plans and group health insurance issuers from discriminating
against individuals on the basis of health factors. The primary effect
and intent of the provision is to increase access to affordable group
health coverage for individuals with health problems. This effect, and
the economic costs and benefits attendant to it, primarily flows from
the statutory provisions of HIPAA that this regulation implements.
However, the statute alone leaves room for varying interpretations of
exactly which practices are prohibited or permitted at the margin.
These regulations draw on the Departments' authority to clarify and
interpret HIPAA's statutory nondiscrimination provisions in order to
secure the protections intended by Congress for plan participants and
beneficiaries. The Departments crafted them to satisfy this mandate in
as economically efficient a manner as possible, and believe that the
economic benefits of the regulations justify their costs. The analysis
underlying this conclusion takes into account both the effect of the
statute and the impact of the discretion exercised in the regulations.
The nondiscrimination provisions of the HIPAA statute and of these
regulations generally apply to both group health plans and group health
insurance issuers. Economic theory predicts that issuers will pass
their costs of compliance back to plans, and that plans may pass some
or all of issuers' and their own costs of compliance to participants.
This analysis is carried out in light of this prediction.
These final regulations are needed to clarify and interpret the
HIPAA nondiscrimination provisions under section 702 of ERISA, section
2702 of the PHS Act, and section 9802 of the Code, and to ensure that
group health plans and group health insurance issuers do not
discriminate against individual participants or beneficiaries based on
any health factors with respect to health care coverage and premiums.
The 2001 interim rules provided additional guidance to explain the
application of the statute to benefits, to clarify the relationship
between the HIPAA nondiscrimination provisions and the HIPAA
preexisting condition exclusion limitations, to explain the
applications of these provisions to premiums, to describe similarly
situated individuals, to explain the application of the provisions to
actively-at-work and nonconfinement clauses, to clarify that more
favorable treatment of individuals with medical needs generally is
permitted, and to describe plans' and issuers' obligations with respect
to plan amendments.\9\ These final regulations clarify the relationship
between the source-of-injury rules and the timing of a diagnosis of a
medical condition and add an example to illustrate how the benefits
rules apply to the carryover feature of HRAs.
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\9\ The Departments' estimate of the economic impact of the 2001
interim final regulations was published at 66 FR 1393 (January 8,
2001). These one-time costs were already absorbed by plans and
issuers and are not discussed in this analysis. In fact, the only
notice requirement in the 2001 interim final regulations was deleted
from the final regulations because the time period for compliance
has passed, with one small exception. Certain self-insured,
nonfederal governmental plans that had opted out of the HIPAA
nondiscrimination provisions under Section 2721(b)(2) of the PHS Act
and that have since decided to opt back in may be required to send a
notice to individuals previously denied coverage due to a health
factor. However, to date, only approximately 550 such plans have
notified CMS that they are opting-out of the HIPAA nondiscrimination
provisions and CMS does not receive information regarding a plan's
decision to opt back in. The Departments estimate that the number of
plans having done this is very small and, therefore, estimate that
the impact of the notice provision on such plans is too small to
calculate.
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The proposed rules on wellness programs were issued in order to
ensure that the exception for wellness programs would not contravene
HIPAA's nondiscrimination provisions. With respect to wellness
programs, these final regulations clarify some ambiguities in the
proposed rules, make some changes in terminology and organization, and
add a description of wellness programs not required to satisfy
additional standards. The final rules also set the maximum reward for
wellness programs that require satisfaction of a standard at 20 percent
of the cost of single coverage (with additional provisions related to
rewards that apply also to classes of dependents), where the proposed
rules had stated the limit in terms of a range of percentages.
Because the 2001 interim rules and proposed regulations on wellness
programs were originally issued as separate rulemaking actions, the
Departments estimated their economic impacts separately. The costs and
benefits of the statutory nondiscrimination provisions and the 2001
interim rules are again described separately from the wellness program
provisions here, due to both differing baselines for the measurement of
impact, and to reliance on different types of information and
assumptions in the analyses.
2. Costs and Benefits of HIPAA's Nondiscrimination Provisions
The Departments have evaluated the impacts of HIPAA's
nondiscrimination provisions. The nondiscrimination provisions of the
2001 interim final rules were estimated to result in costs of about $20
million to amend plans, revise plan informational materials, and notify
employees previously denied coverage on the basis of a health factor of
enrollment opportunities. Because these costs were associated with one-
time activities that were required to be completed by the applicability
date of the 2001 interim rules, these costs have been fully defrayed.
The primary statutory economic benefits associated with the HIPAA
nondiscrimination provisions derive from increased access to affordable
group health plan coverage for individuals whose health factors had
previously restricted their participation in such plans. Expanding
access entails both benefits and costs. Newly-covered individuals, who
previously had to purchase similar services out-of-pocket, reap a
simple and direct financial gain. In addition, these individuals may be
induced to consume more (or different) health care services, reaping a
benefit which has financial value, and which in some cases will produce
additional indirect benefits both to the individual (improved health)
and possibly to the economy at large.\10\
[[Page 75026]]
Inclusion of these newly-covered individuals, though, will increase
both premiums and claims costs incurred by group health plans. Economic
theory predicts that these costs will ultimately be shifted to all plan
participants or employees, either through an increased share of
insurance costs, or lowered compensation.\11\ If the number of newly-
covered individuals is small relative to the total number of plan
participants and costs are distributed evenly, then the increased
burden for each individual should be minimal. However, it is unclear
how previously-covered individuals will respond to subsequent changes
in their benefits package and if their response will have unforeseen
economic costs.\12\ The HIPAA nondiscrimination cost is estimated to be
substantial. Annual group health plan costs average approximately
$7,100 per-participant,\13\ and it is likely that average costs would
be higher for individuals who had been denied coverage due to health
factors. Prior to HIPAA's enactment, less than one-tenth of one percent
of employees, or roughly 120,000 in today's labor market, were denied
employment-based coverage annually because of health factors.\14\ A
simple assessment suggests that the total cost of coverage for such
employees could be $850 million. However, this estimated statutory
transfer is small relative to the overall cost of employment-based
health coverage. Group health plans will spend over $620 billion this
year to cover approximately 174 million employees and their
dependents.\15\ Estimated costs under HIPAA's nondiscrimination
provisions represent a very small fraction of one percent of total
group health plan expenditures.
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\10\ Individuals without health insurance are less likely to get
preventive care and less likely to have a regular source of care. A
lack of health insurance generally increases the likelihood that
needed medical treatment will be forgone or delayed. Forgoing or
delaying care increases the risk of adverse health outcomes. These
adverse outcomes in turn generate higher medical costs, which are
often shifted to public funding sources (and therefore to taxpayers)
or to other payers. They also erode productivity and the quality of
life. Improved access to affordable group health coverage for
individuals with health problems under HIPAA's nondiscrimination
provisions will lead to more insurance coverage, timelier and fuller
medical care, better health outcomes, and improved productivity and
quality of life. This is especially true for the individuals most
affected by HIPAA's nondiscrimination provisions--those with adverse
health conditions. Denied insurance, individuals in poorer health
are more likely to suffer economic hardship, to forgo badly needed
care for financial reasons, and to suffer adverse health outcomes as
a result. For them, gaining insurance is more likely to mean gaining
economic security, receiving timely, quality care, and living
healthier, more productive lives. For an extensive discussion of the
consequences of uninsurance, see: ``The Uninsured and their Access
to Health Care'' (2004). The Kaiser Commission on Medicaid and the
Uninsured, November; ``Insuring America's Health'', (2004).
Institute of Medicine; ``Health Policy and the Uninsured'' (2004)
edited by Catherine G. McLaughlin. Washington, DC: Urban Institute
Press; Miller, Wilhelmine et al (2004) ``Covering the Uninsured:
What is it Worth,'' Health Affairs, March: w157-w167.
\11\ The voluntary nature of the employment-based health benefit
system in conjunction with the open and dynamic character of labor
markets make explicit as well as implicit negotiations on
compensation a key determinant of the prevalence of employee
benefits coverage. It is likely that 80% to 100% of the cost of
employee benefits is borne by workers through reduced wages (see for
example Jonathan Gruber and Alan B. Krueger, ``The Incidence of
Mandated Employer-Provided Insurance: Lessons from Workers
Compensation Insurance,'' Tax Policy and Economy (1991); Jonathan
Gruber, ``The Incidence of Mandated Maternity Benefits,'' American
Economic Review, Vol. 84 (June 1994), pp. 622-641; Lawrence H.
Summers, ``Some Simple Economics of Mandated Benefits,'' American
Economic Review, Vol. 79, No. 2 (May 1989); Louise Sheiner, ``Health
Care Costs, Wages, and Aging,'' Federal Reserve Board of Governors
working paper, April 1999; and Edward Montgomery, Kathryn Shaw, and
Mary Ellen Benedict, ``Pensions and Wages: An Hedonic Price Theory
Approach,'' International Economic Review, Vol. 33 No. 1, Feb.
1992.). The prevalence of benefits is therefore largely dependent on
the efficacy of this exchange. If workers perceive that there is the
potential for inappropriate denial of benefits they will discount
their value to adjust for this risk. This discount drives a wedge in
the compensation negotiation, limiting its efficiency. With workers
unwilling to bear the full cost of the benefit, fewer benefits will
be provided. The extent to which workers perceive a federal
regulation supported by enforcement authority to improve the
security and quality of benefits, the differential between the
employers costs and workers willingness top accept wage offsets is
minimized.
\12\ Research shows that while the share of employers offering
insurance is generally stable and eligibility rates have only
declined slightly over time, the overall increase in uninsured
workers is due to the decline in worker take-up rates, which workers
primarily attribute to cost. Research on elasticity of coverage,
however, has focused on getting uninsured workers to adopt coverage
(which appears to require large subsidies) rather than covered
workers opting out of coverage. This makes it difficult to ascertain
the loss in coverage that would result from a marginal increase in
costs. (See, for example, David M. Cutler ``Employee Costs and the
Decline in Health Insurance Coverage'' NBER Working Paper
9036. July 2002; Gruber, Jonathon and Ebonya Washington.
``Subsidies to Employee Health Insurance Premiums and the Health
Insurance Market'' NBER Working Paper 9567. March 2003; and
Cooper, PF and J. Vistnes. ``Workers' Decisions to Take-up Offered
Insurance Coverage: Assessing the Importance of Out-of-Pocket
Costs'' Med Care 2003, 41(7 Suppl): III35-43.) Finally, economic
discussions on elasticity of insurance tend to view coverage as a
discrete concept and does not consider that the value of coverage
may have also changed.
\13\ Departments' tabulations using the 2005 Kaiser Family
Foundation's Employer Health Benefits Annual Survey. Average
employee premium is a weighted average of premiums for single,
family, and employee-plus-one health plans. The estimate for
Employee-Plus-One health premiums was derived using the 2003 MEPS-
IC, as was the share of employees in each type of plans.
Participants are defined as the workers or primary policy holders.
\14\ Departments' tabulations off the February 1997 Current
Population Survey (CPS), Contingent Worker Supplement. The estimate
was projected to reflect current labor market conditions by assuming
the same share of the employed, civilian force would be affected and
using the 2004 CPS table, ``Employment status of the civilian
noninstitutional population, 1940 to date.''
\15\ The Departments' estimate is based on the Office of the
Actuary at the Centers for Medicare and Medicaid Services (CMS)
projected measure of total personal health expenditures by private
health insurance in 2005. This total ($707.0 billion) is then
multiplied by the share of privately insured individuals covered by
employer-sponsored health insurance in 2004 as estimated by the 2005
March CPS (88 percent).
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3. Costs and Benefits of Finalizing the 2001 Interim Rules
Prohibiting Discrimination
Many of the provisions of these regulations serve to specify more
precisely than the statute alone exactly what practices are prohibited
by HIPAA as unlawful discrimination in eligibility or employee premiums
among similarly situated employees. For example, under the regulations,
eligibility generally may not be restricted based on an individual's
participation in risky activities, confinement to an institution, or
absence from work on an individual's enrollment date due to illness.
The regulations provide that various plan features including waiting
periods and eligibility for certain benefits constitute rules for
eligibility which may not vary across similarly situated individuals
based on health factors. They also provide that plans may not
reclassify employees based on health factors in order to create
separate groups of similarly situated individuals among which
discrimination would be permitted.
All of these provisions have the effect of clarifying and ensuring
certain participants' right to freedom from discrimination in
eligibility and premium amounts, thereby securing their access to
affordable group health plan coverage. The costs and benefits
attributable to these provisions resemble those attendant to HIPAA's
statutory nondiscrimination provisions. Securing participants' access
to affordable group coverage provides economic benefits by reducing the
numbers of uninsured and thereby improving health outcomes. The
regulations entail a shifting of costs from the employees whose rights
are secured (and/or from other parties who would otherwise pay for
their health care) to plan sponsors (or to other plan participants if
sponsors pass those costs back to them).
The Departments lack any basis on which to distinguish these
benefits and costs from those of the statute itself. It is unclear how
many plans were engaging in the discriminatory practices targeted for
prohibition by these regulatory provisions. Because these provisions
operate largely at the margin of the statutory requirements, it is
likely that the effects of these provisions were far smaller than the
similar statutory effects. The Departments are confident, however, that
by securing employees' access to affordable coverage at the margin, the
regulations, like the statute, have yielded benefits that justify
costs.
Clarifying Requirements
Additional economic benefits derive directly from the improved
clarity provided by the regulations. The regulation provides clarity
through both its provisions and its examples of how those provisions
apply in various circumstances. By clarifying employees' rights and
plan sponsors' obligations under HIPAA's nondiscrimination provisions,
the regulations reduce uncertainty and costly disputes over these
rights and obligations. Greater clarity promotes employers' and
employees' common understanding of the value of group health plan
benefits and confidence in the security and predictability of those
benefits, thereby improving labor market efficiency and fostering the
establishment and
[[Page 75027]]
continuation of group health plans by employers.
Impact of the Final Rules
As noted earlier in this preamble, the Departments have not
modified the 2001 interim rules in any way that would impact the
original cost estimates or the magnitude of the statutory transfers.
Accordingly, no impact is attributable to these final regulations when
measured against the baseline of the interim final rules. The
provisions of the 2001 interim rules offer the appropriate baseline for
this measurement because these rules were generally applicable for plan
years beginning on or after July 1, 2001.
4. Costs and Benefits of the Rules Applicable to Wellness Programs
By contrast with the nondiscrimination regulatory provisions issued
as interim final rules, the provisions relating to wellness programs
were issued as proposed rules. This final regulation will not become
effective until its applicability date.
Under the final regulation, health plans generally may vary
employee premium contributions or benefit levels across similarly
situated individuals based on a health factor only in connection with
wellness programs. The final regulation establishes five requirements
for wellness programs that vary premiums or benefits based on
participation in the program and condition a reward involving premiums
or benefits on satisfaction of a standard related to a health factor.
These requirements will, therefore, apply to only a subset of all
wellness programs.
Available literature, together with comments received by the
Departments, demonstrate that well-designed wellness programs can
deliver benefits well in excess of their costs. For example, the U.S.
Centers for Disease Control and Prevention estimate that implementing
proven clinical smoking cessation interventions can save one year of
life for each $2,587 invested.\16\ In addition to reduced mortality,
benefits of effective wellness programs can include reduced
absenteeism, improved productivity, and reduced medical costs.\17\ The
requirements of the final regulation were crafted to accommodate and
not impair such beneficial programs, while combating discrimination in
eligibility and premiums for similarly situated individuals as intended
by Congress.
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\16\ Cromwell, J., W. J. Bartosch, M. C. Fiore, V. Hasselblad
and T. Baker. ``Cost-Effectiveness of the Clinical Practice
Recommendations in the AHCPR Guideline for Smoking Cessation.''
Journal of the American Medical Association, vol. 278 (December 3,
1997): 1759-66.
\17\ The benefits of employer wellness programs are well
documented. One study found the annual per participant savings to be
$613 while private companies have reported returns of as much as
$4.50 in lowered medical expenses for every dollar spent on health
programs. (See for example, Gregg M. State et al, ``Quantifiable
Impact of the Contract for Health Wellness: Health Behaviors, Health
Care Costs, Disability and Workers' Compensation,'' Journal of
Occupational and Environmental Medicine (2003), vol. 45 (2):109-117;
Morgan O'Rourke & Laura Sullivan, ``A Health Return on Employee
Investment'' Risk Management (2003), vol. 50 (11): 34-38; American
Association of Health Plans and Health Insurance Association of
America ``The Cost Savings of Disease Management Programs: Report on
a Study of Health Plans,'' November, 2003; Rachel Christensen,
``Employment-Based Health Promotion and Wellness Programs'' EBRI
Notes (2001), vol. 22 (7): 1-6; and Steven G. Aldana ``Financial
Impact of Wellness Programs: A Comprehensive Review of the
Literature,'' American Journal of Health Promotions (2001), vol. 15
(5): 296-320.)
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Estimation of the economic impacts of the requirements is difficult
because data on affected plans' current practices are incomplete, and
because plans' approaches to compliance with the requirements and the
effects of those approaches will vary and cannot be predicted.
Nonetheless, the Departments endeavored to consider the impacts fully
and to develop estimates based on reasonable assumptions.
The Departments estimate that 1.6 percent of large plans and 1.2
percent of small plans currently vary employee premium contributions
across similarly situated individuals due to participation in a
wellness program that provides rewards based on satisfaction of a
standard related to a health factor.\18\ This amounts to 30,000 plans
covering 1.1 million participants. According to survey data reported by
Hewitt Associates,\19\ just less than one-half as many plans vary
benefit levels across similarly situated individuals as vary premiums.
This amounts to 13,000 plans covering 460,000 participants. The
Departments considered the effect of each of the five requirements on
these plans. For purposes of its estimates, the Departments assumed
that one-half of the plans in the latter group are also included in the
former, thereby estimating that 37,000 plans covering 1.3 million
participants will be subject to the five requirements for wellness
programs.
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\18\ Estimates are based on a 1993 survey of employers by the
Robert Wood Johnson Foundation. More recent estimates are
unavailable.
\19\ Hewitt Associates, July 2003.
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Limit on Reward
Under the first requirement, any reward, whether applicable to
employee premiums or benefit levels, must not exceed 20 percent of the
total premium for employee-only coverage under the plan (with
additional provisions related to rewards that apply also to classes of
dependents). This percentage is the highest of the three alternative
percentages suggested in the proposed rule, and the award limit used
for purposes of the analysis of the proposed rule, which was 15
percent--the midpoint of the three alternative percentages suggested in
the proposal. The estimates here also reflect increases in average
annual premiums and the numbers of plans and participants since
publication of the proposed rules.
The Departments lack representative data on the magnitude of the
rewards applied by affected plans today. One consultant practicing in
this area suggested that wellness incentive premium discounts ranged
from about 3 percent to 23 percent, with an average of about 11
percent.\20\ This suggests that most affected plans, including some
whose discounts are somewhat larger than average, already comply with
the first requirement and will not need to reduce the size of the
rewards they apply. It appears likely, however, that perhaps a few
thousand plans covering approximately one hundred thousand participants
will need to reduce the size of their rewards in order to comply with
the first requirement.
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\20\ This estimate was made in 1998, shortly after the 1997
interim final rule was published. Since then, it appears that
wellness programs advocates have been advising health plans to offer
premium discounts in the range of 5 to 11 percent, well below the
proposed ceiling. For a full discussion, see Larry Chapman's,
``Increasing Participation in Wellness Programs,'' National Wellness
Institute Members ``Ask the Expert,'' July/August 2004.
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The Departments considered the potential economic effects of
requiring these plans to reduce the size of their rewards. These
effects are likely to include a shifting of costs between plan sponsors
and participants, as well as new economic costs and benefits. Shifts in
costs will arise as plans reduce rewards where necessary. Plan sponsors
can exercise substantial control over the size and direction of these
shifts. Limiting the size of rewards restricts only the differential
treatment between participants who satisfy wellness program standards
and those who do not. It does not, for example, restrict plans
sponsors' flexibility to determine the overall respective employer and
employee shares of base premiums. Possible outcomes include a shifting
of costs to plan sponsors from participants who satisfy wellness
program standards, from plan sponsors to participants who do not
satisfy the standards, from participants who satisfy the standards to
those who do not, or some combination of these.
[[Page 75028]]
The Departments developed a very rough estimate of the total amount
of costs that might derive from this requirement. The Departments'
estimate assumes that (1) all rewards take the form of employee premium
discounts; (2) discounts are distributed evenly within both the low-to-
average range and the average-to-high range, and are distributed across
these ranges such that their mean equals the assumed average; and (3)
70 percent of participants qualify for the discount. The 4,000 affected
plans could satisfy this requirement by reducing the premium discount
for the 100,000 participants who successfully complete a certified
wellness program. When applied to the 2005 average annual employee-only
premium of $4,024,\21\ discounts range from $115 to $920, with an
average of $460. The maximum allowable discount based on 20 percent of
current premium is $805. Reducing all discounts greater than $805 to
that amount will result in an average annual reduction of about $57.
Applying this reduction to the 100,000 participants assumed to be
covered by 4,000 plans affected by the limit results in an estimate of
the aggregate cost at $6 million.
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\21\ Average based on the Kaiser Family Foundation/Health
Research and Education Trust Survey of Employer-Sponsored Health
Benefits, 2005.
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New economic costs and benefits may arise if changes in the size of
rewards result in changes in participant behavior. Net economic welfare
might be lost if some wellness programs' effectiveness is eroded, but
the magnitude and incidence of such effects is expected to be
negligible. Consider a wellness program that discounts premiums for
participants who take part in an exercise program. It is plausible
that, at the margin, a few participants who would take part in order to
obtain an existing discount will not take part to obtain a somewhat
lower discount. This effect is expected to be negligible, however.
Reductions in discounts are likely to average about $57 annually, which
is very small when spread over biweekly pay periods. Moreover, the
final regulation limits only rewards applied to similarly situated
individuals in the context of a group health plan. It does not restrict
plan sponsors from encouraging healthy lifestyles in other ways, such
as by varying life insurance premiums.
On the other hand, net economic welfare likely will be gained in
instances where large premium differentials would otherwise have served
to discourage enrollment in health plans by employees who did not
satisfy wellness program requirements.
The Departments believe that the net economic gains from
prohibiting rewards so large that they could discourage enrollment
based on health factors justify any net losses that might derive from
the negligible reduction of some employees' incentive to participate in
wellness programs.
Reasonable Design
Under the second requirement, the program must be reasonably
designed to promote health or prevent disease. The Departments believe
that a program that is not so designed would not provide economic
benefits, but would serve merely to shift costs from plan sponsors to
targeted individuals based on health factors. Comments received by the
Departments and available literature on employee wellness programs,
however, suggest that existing wellness programs generally satisfy this
requirement. As was stated in the analysis of the proposed rule, this
requirement therefore is not expected to compel plans to modify
existing wellness programs or entail additional economic costs.
Annual Opportunity To Qualify
Although this requirement was included in the proposal within the
requirement for reasonable design, it has been reorganized as a
separate provision in these final regulations. At the time of the
proposal, the Departments assumed that most plans satisfied the
requirements for reasonable design, such that they would not be
required to modify existing programs. Accordingly, no cost was
attributed to the reasonable design requirements when taken together.
The Departments did request comments on this assumption, but received
no additional information in response. Accordingly, the Departments
have not attributed a cost to this provision of the final regulations.
Uniform Availability
The fourth requirement provides that where rewards are conditioned
on satisfaction of a standard related to a health factor, rewards must
be available to all similarly situated individuals. A reward is not
available to all similarly situated individuals unless the program
allows for a reasonable alternative standard if the otherwise
applicable initial standard is unreasonably difficult to achieve due to
a medical condition or medically inadvisable for the individual to
meet. In particular, the program must offer any such individual the
opportunity to satisfy a reasonable alternative standard. Comments
received by the Departments and available literature on employee
wellness programs suggest that some wellness programs do not currently
satisfy this requirement and will have to be modified. The Departments
estimate that among employers that provide incentives for employees to
participate in wellness programs, nine percent require employees to
achieve a low risk behavior to qualify for the incentive, 53 percent
require a pledge of compliance, and 55 percent require participation in
a program.\22\ Depending on the nature of the wellness program, it
might be unreasonably difficult due to a medical condition or medically
inadvisable for at least some plan participants to achieve the behavior
or to comply with or participate in the program.
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\22\ Hewitt Associates, July, 2003. The sum of these shares
exceeds 100 percent due to some employers using multiple criteria to
determine compliance.
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The Departments identified three broad types of economic impact
that might arise from this requirement. First, affected plans will
incur some economic cost to make available reasonable alternative
standards. Second, additional economic costs and benefits may arise
depending on the nature of alternatives provided, individuals' use of
these alternatives, and any changes in the affected individuals'
behavioral and health outcomes. Third, some costs may be shifted from
individuals who would fail to satisfy programs' initial standards, but
who will satisfy reasonable alternative standards once available (and
thereby qualify for associated rewards), to plan sponsors (or to other
participants in their plans if plan sponsors elect to pass these costs
back to all participants).
The Departments note that some plans that offer rewards to
similarly situated individuals based on their ability to meet a
standard related to a health factor (and are therefore subject to the
requirement) may not need to provide alternative standards. The
requirement provides that alternative standards need not be specified
or provided until a participant for whom it is unreasonably difficult
due to a medical condition or medically inadvisable to satisfy the
initial standard seeks such an alternative. Some wellness programs'
initial standards may be such that no participant would ever find them
unreasonably difficult to satisfy due to a medical condition or
medically inadvisable to attempt. The Departments estimate that 3,000
potentially affected plans have initial wellness program standards that
might be unreasonably difficult for some participants to satisfy due to
a medical condition or medically
[[Page 75029]]
inadvisable to attempt.\23\ Moreover, because alternatives need not be
made available until they are sought by qualified plan participants, it
might be possible for some plans to go for years without needing to
make available an alternative standard. This could be particularly
likely for small plans.\24\
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\23\ Estimate is based on both the share of plans in the 2003-04
Hewitt survey stating that certain health factors or lifestyle
choices affect employees' benefit coverage and the share of
employers requiring employees to achieve a lower-risk behavior to
earn incentives. These measures are then combined with the number of
workers in the civilian labor force (from 2003 estimates of the
Bureau of Labor Statistics (BLS) suffering from these maladies (as
provided by the Centers for Disease Control (CDC) 2004 Health and
the National Center for Statistics and Analysis (NCSA) 2004
estimates of seatbelt use), by demographic group.
\24\ The most common standards that would be implemented by this
provision of the wellness program rules pertain to smoking, blood
pressure, and cholesterol levels, according to the Hewitt survey.
Based on data from the CDC, NCSA and BLS, the Departments estimate
that among plans with five participants, about one-fourth will not
contain any smokers, one-third will not contain participants with
high blood pressure and two-fifths will not contain any with high
cholesterol. Approximately 97 percent of all plans with potentially
difficult initial wellness program standards have fewer than 100
participants.
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The Departments estimate that as many as 27 percent of participants
in plans with rewards that are based on meeting a standard related to a
health factor, or 344,000 individuals, might fail to satisfy wellness
programs' initial standards because they are unreasonably difficult due
to a medical condition or medically inadvisable to meet.\25\ Of these,
only about 30,000 are in the 3,000 plans assumed to apply standards
that might be unreasonably difficult due to a medical condition or
medically inadvisable for some plan participants to satisfy. The
standards would in fact be unreasonably difficult or medically
inadvisable to satisfy for some subset of these individuals--roughly
two-thirds, or 19,000 by the Departments' estimate.\26\ Of these, it is
assumed that between 5,000 and 19,000 of those individuals that seek
alternative standards are able to satisfy them.\27\
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\25\ This estimate is considerably lower than that offered in
the proposal due to a difference in the format of the data reported
in the 2001 and 2003 Hewitt surveys, and the Departments' original
adjustment for data reported in the 2001 survey as, ``not
provided.'' The Departments believe in light of the 2003 data that
the adjustments thought to be appropriate at the time overestimated
the number of plans with standards that might be unreasonably
difficult or medically inadvisable to meet, resulting in more
instances in which alternative standards might be establishe |
