Incentives for Nondiscriminatory Wellness Programs in Group Health Plans

7/30/2019 Incentives for Nondiscriminatory Wellness Programs in Group Health Plans

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Vol. 77 Monday,

No. 227 November 26, 2012

Part IV

Department of the Treasury

Internal Revenue Service

26 CFR Part 54

Department of Labor

Employee Benefits Security Administration

29 CFR Part 2590

Department of Health and Human Services

45 CFR Parts 146 and 147

Incentives for Nondiscriminatory Wellness Programs in Group Health Plans;

Proposed Rule

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70620 Federal Register / Vol. 77, No. 227/ Monday, November 26, 2012/ Proposed Rules

1The term group health plan is used in title

XXVII of the PHS Act, part 7 of ERISA, and chapter100 of the Code, and is distinct from the termhealth plan, as used in other provisions of titleI of the Affordable Care Act. The term health plandoes not include self-insured group health plans.

2The HIPAA nondiscrimination provisions setforth eight health status-related factors, which theDecember 13, 2006 final regulations onnondiscrimination and wellness programs refer toas health factors. Under HIPAA and the 2006regulations, the eight health factors are healthstatus, medical condition (including both physicaland mental illnesses), claims experience, receipt ofhealth care, medical history, genetic information,evidence of insurability (including conditionsarising out of acts of domestic violence), anddisability. See 66 FR 1379, January 8, 2001.

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

[REG12270712]

RIN 1545BL07

DEPARTMENT OF LABOR

Employee Benefits SecurityAdministration

29 CFR Part 2590

RIN 1210AB55

DEPARTMENT OF HEALTH ANDHUMAN SERVICES

45 CFR Parts 146 and 147

[CMS9979P]

RIN 0938AR48

Incentives for NondiscriminatoryWellness Programs in Group HealthPlans

AGENCY: Internal Revenue Service,Department of the Treasury; EmployeeBenefits Security Administration,Department of Labor; Centers forMedicare & Medicaid Services,Department of Health and HumanServices.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document proposesamendments to regulations, consistentwith the Affordable Care Act, regardingnondiscriminatory wellness programs ingroup health coverage. Specifically,these proposed regulations wouldincrease the maximum permissiblereward under a health-contingentwellness program offered in connectionwith a group health plan (and anyrelated health insurance coverage) from20 percent to 30 percent of the cost ofcoverage. The proposed regulationswould further increase the maximumpermissible reward to 50 percent forwellness programs designed to preventor reduce tobacco use. These regulations

also include other proposedclarifications regarding the reasonabledesign of health-contingent wellnessprograms and the reasonablealternatives they must offer in order toavoid prohibited discrimination.

DATES: Comments are due on or beforeJanuary 25, 2013.

ADDRESSES: Written comments may besubmitted to the Department of Labor asspecified below. Any comment that issubmitted will be shared with the otherDepartments and will also be made

available to the public. Warning: Do notinclude any personally identifiableinformation (such as name, address, orother contact information) orconfidential business information thatyou do not want publicly disclosed. Allcomments may be posted on the Internetand can be retrieved by most Internetsearch engines. No deletions,

modifications, or redactions will bemade to the comments received, as theyare public records. Comments may besubmitted anonymously.

Comments, identified by WellnessPrograms, may be submitted by one ofthe following methods:

Federal eRulemaking Portal:http://www.regulations.gov.Follow theinstructions for submitting comments.

Mail or Hand Delivery:Office ofHealth Plan Standards and ComplianceAssistance, Employee Benefits SecurityAdministration, Room N5653, U.S.Department of Labor, 200 Constitution

Avenue NW., Washington, DC 20210,Attention:Wellness Programs.Comments received will be posted

without change to www.regulations.govand www.dol.gov/ebsa,and available forpublic inspection at the PublicDisclosure Room, N1513, EmployeeBenefits Security Administration, 200Constitution Avenue NW., Washington,DC 20210, including any personalinformation provided.FOR FURTHER INFORMATION CONTACT:Amy Turner or Beth Baum, EmployeeBenefits Security Administration,Department of Labor, at (202) 6938335;Karen Levin, Internal Revenue Service,Department of the Treasury, at (202)6226080; or Jacob Ackerman, Centersfor Medicare & Medicaid Services,Department of Health and HumanServices, at (410) 7861565.

Customer Service Information:Individuals interested in obtaininginformation from the Department ofLabor concerning employment-basedhealth coverage laws may call the EBSAToll-Free Hotline at 1866444EBSA(3272) or visit the Department of LaborsWeb site (www.dol.gov/ebsa). Inaddition, information from HHS onprivate health insurance for consumers

can be found on the Centers forMedicare & Medicaid Services (CMS)Web site (www.cciio.cms.gov/) andinformation on health reform can befound at www.HealthCare.gov.SUPPLEMENTARY INFORMATION:

I. Background

A. Introduction

The Patient Protection and AffordableCare Act, Public Law 111148, wasenacted on March 23, 2010; the HealthCare and Education Reconciliation Act,

Public Law 111152, was enacted onMarch 30, 2010 (these are collectivelyknown as the Affordable Care Act).The Affordable Care Act reorganizes,amends, and adds to the provisions ofpart A of title XXVII of the PublicHealth Service Act (PHS Act) relating togroup health plans and health insuranceissuers in the group and individual

markets. The term group health planincludes both insured and self-insuredgroup health plans.1 The AffordableCare Act adds section 715(a)(1) to theEmployee Retirement Income SecurityAct (ERISA) and section 9815(a)(1) tothe Internal Revenue Code (the Code) toincorporate the provisions of part A oftitle XXVII of the PHS Act into ERISAand the Code, and to make themapplicable to group health plans andhealth insurance issuers providinghealth insurance coverage in connectionwith group health plans. The PHS Actsections incorporated by these

references are sections 2701 through2728.

B. Wellness Exception to HIPAANondiscrimination Provisions

Prior to the enactment of theAffordable Care Act, Titles I and IV ofthe Health Insurance Portability andAccountability Act of 1996 (HIPAA),Public Law 104191, added section9802 of the Code, section 702 of ERISA,and section 2702 of the PHS Act(HIPAA nondiscrimination andwellness provisions). These provisionsgenerally prohibit group health plansand group health insurance issuers from

discriminating against individualparticipants and beneficiaries ineligibility, benefits, or premiums basedon a health factor.2 An exception to thegeneral rule allows premium discountsor rebates or modification to otherwiseapplicable cost sharing (includingcopayments, deductibles orcoinsurance) in return for adherence tocertain programs of health promotionand disease prevention. TheDepartments of Labor, Health andHuman Services (HHS), and the

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70621Federal Register / Vol. 77, No. 227/ Monday, November 26, 2012/ Proposed Rules

3See 26 CFR 54.98021; 29 CFR 2590.702; 45CFR 146.121. Prior to issuance of the final 2006regulations, the Departments published interimfinal regulations with request for commentimplementing the HIPAA nondiscriminationprovisions on April 8, 1997 at 62 FR 16894,

followed by proposed regulations regardingwellness programs on January 8, 2001 at 66 FR1421.

4See paragraph (f)(1) of the 2006 regulations. Seealso 26 CFR 54.98021(d), 29 CFR 2590.702(d), and45 CFR 146.121(d), which provide that, generally,distinctions among groups of similarly situatedparticipants in a health plan must be based on bonafide employment-based classifications consistentwith the employers usual business practice. A planmay also distinguish between beneficiaries basedon, for example, their relationship to the planparticipant (such as spouse or dependent child) orbased on the age of dependent children.Distinctions are not permitted to be based on anyof the health factors noted earlier.

5The Treasury and the IRS note that satisfying therules for wellness programs does not determine thetax treatment of benefits provided by the wellness

program. For example, fitness center fees aregenerally considered expenses for general goodhealth and thus payment of the fee by the employeris not excluded from income as the reimbursementof a medical expense.

6Note that section 2713 of the PHS Act, as addedby the Affordable Care Act, and the Departmentsinterim final regulations at 26 CFR 54.98152713T,29 CFR 2590.7152713, and 45 CFR 147.130 requirenon-grandfathered group health plans and healthinsurance issuers offering non-grandfathered groupor individual health insurance coverage to providebenefits for certain preventive health serviceswithout the imposition of cost sharing. See also 26CFR 54.98151251T, 29 CFR 2590.7151251, and45 CFR 147.140 (regarding the definition ofgrandfathered health plan coverage).

7See 26 CFR 54.98021(b)(2)(ii) and (c)(3); 29CFR 2590.702(b)(2)(ii) and (c)(3); and 45 CFR146.121(b)(2)(ii) and (c)(3).

8Section 1201 of the Affordable Care Act alsomoved the guaranteed availability provisions thatwere previously codified in PHS Act section 2711to PHS Act section 2702, and extended thoserequirements to the individual market.

9See 26 CFR 54.98151251T, 29 CFR 2590.7151251, and 45 CFR 147.140 (75 FR 34538, June 17,2010), as amended (75 FR 70114, November 17,2010). See also Q5 of Affordable Care ActImplementation FAQs Part II (October 8, 2010),available at http;//www.dol.gov/ebsa/faqs/faq-aca2.html and http://cciio.cms.gov/resources/factsheets/aca_implementation_faqs2.html.

Treasury (collectively, the Departments)have implemented this exception byallowing benefits (including costsharing), premiums, or contributions tovary based on participation in awellness program if such a programadheres to certain conditions set forth inregulations.

The Departments published joint final

regulations on December 13, 2006 at 71FR 75014 (the 2006 regulations)regarding the HIPAA nondiscriminationand wellness provisions.3 The 2006regulations divide wellness programsinto two general categories. The firstcategory is programs that either do notrequire an individual to meet a standardrelated to a health factor in order toobtain a reward or that do not offer areward at all (participatory wellnessprograms). Participatory wellnessprograms comply with thenondiscrimination requirementswithout having to satisfy any additional

standards if participation in the programis made available to all similarlysituated individuals.4 Examples ofparticipatory wellness programs in the2006 regulations include a fitness centerreimbursement program,5 a diagnostictesting program that does not base anyreward on test outcomes, a program thatwaives cost sharing for prenatal or well-

baby visits,6 a program that reimburses

employees for the costs of smokingcessation programs regardless ofwhether the employee quits smoking,and a program that provides rewards forattending a free health educationseminar. There is no limit on thefinancial incentives for participatorywellness programs.

The second category of wellness

programs under the 2006 regulationsconsists of programs that requireindividuals to satisfy a standard relatedto a health factor in order to obtain areward (health-contingent wellnessprograms). This category includeswellness programs that require anindividual to attain or maintain acertain health outcome in order toobtain a reward (such as not smoking,attaining certain results on biometricscreenings, or meeting targets forexercise). As outlined in the 2006regulations,7 plans and issuers may vary

benefits (including cost-sharing

mechanisms), premiums, orcontributions based on whether anindividual has met the standards of awellness program that meets therequirements of paragraph (f). Paragraph(f)(2) of the 2006 regulations prescribesthe following consumer-protectionconditions for health-contingentwellness programs:

1. The total reward for such wellnessprograms offered by a plan sponsor doesnot exceed 20 percent of the total costof coverage under the plan.

2. The program is reasonably designedto promote health or prevent disease.For this purpose, it must have areasonable chance of improving healthor preventing disease, not be overly

burdensome, not be a subterfuge fordiscriminating based on a health factor,and not be highly suspect in method.

3. The program gives eligibleindividuals an opportunity to qualify forthe reward at least once per year.

4. The reward is available to allsimilarly situated individuals. For thispurpose, a reasonable alternativestandard (or waiver of the otherwiseapplicable standard) must be madeavailable to any individual for whom itis unreasonably difficult due to a

medical condition to satisfy theotherwise applicable standard duringthat period (or for whom it is medicallyinadvisable to attempt to satisfy theotherwise applicable standard).

5. In all plan materials describing theterms of the program, the availability ofa reasonable alternative standard (or thepossibility of waiver of the otherwiseapplicable standard) is disclosed.

C. Amendments Made by the AffordableCare Act

The Affordable Care Act (section1201) amended the nondiscriminationand wellness program provisions of thePHS Act (but not of ERISA section 702or Code section 9802). (Affordable CareAct section 1201 also moved thoseprovisions from PHS Act section 2702 toPHS Act section 2705). As amended bythe Affordable Care Act, thenondiscrimination and wellnessprovisions of PHS Act section 2705largely reflect the 2006 regulations(except as discussed later in thispreamble), and extend thenondiscrimination protections to theindividual market.8 The wellnessprogram exception to the prohibition ondiscrimination under PHS Act section2705 applies with respect to grouphealth plans (and any health insurancecoverage offered in connection withsuch plans). Section 2705(l) separately

provides for a 10-State wellnessprogram demonstration project in theindividual market, to be established notlater than July 1, 2014 (as such, thisproposed rule does not include wellnessprogram policy for the individualmarket).

D. Application to Grandfathered Plans

Section 1251 of the Affordable CareAct provides that certain amendmentsmade by the Affordable Care Actgenerally do not apply to plans or healthinsurance coverage that are in effect onthe date of enactment (and that are notchanged in ways specified inimplementing regulations),9 except asspecified in section 1251(a)(3) and (4) ofthe Affordable Care Act. Specifically,section 1251(a)(2) of the Affordable CareAct provides that subtitles A and C oftitle I of the Affordable Care Act, andthe amendments made by such subtitles,shall not apply to such grandfatheredhealth plans.

Because the amendments made to thePHS Act in section 1201 of theAffordable Care Act do not apply tograndfathered health plans, the versionof PHS Act section 2702 in effect at thetime of enactment of the Affordable Care

Act (and the 2006 regulations under thatsection) continues to apply to

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10See 26 CFR 54.98151251T(c)(2), 29 CFR2590.7151251(c)(2), and 45 CFR 147.140(c)(2),providing that a grandfathered health plan mustcomply with the requirements of the PHS Act,ERISA, and the Code applicable prior to thechanges enacted by the Affordable Care Act, to theextent not inconsistent with the rules applicable toa grandfathered health plan (75 FR 34538, June 17,2010).

1126 CFR 54.98021(b)(2)(ii) and (c)(3); 29 CFR2590.702(b)(2)(ii) and (c)(3); and 45 CFR146.121(b)(2)(ii) and (c)(3).

12Until these proposed regulations are finalizedand effective, the provisions of the 2006regulations, at 26 CFR 54.98021(f), 29 CFR2590.702(f), and 45 CFR 146.121(f) generally remainapplicable to group health plans and group healthinsurance issuers.

grandfathered health plans, while theprovisions of the new PHS Act section2705 apply to non-grandfathered healthplans for plan years (in the individualmarket, policy years) beginning on orafter January 1, 2014.10 ERISA section702 and Code section 9802 continue togovern all group health plans, includinggrandfathered health plans, and, for

plan years beginning on or after January1, 2014, ERISA section 715(a)(1) andCode section 9815(a)(1) will also applynew PHS Act section 2705 to non-grandfathered health plans.

However, because the Departmentsbelieve that the provisions of theseproposed regulations would beauthorized under either HIPAA or theAffordable Care Act, the Departmentsare proposing in this rulemaking toapply the same set of standards to bothgrandfathered and non-grandfatheredhealth plans. As noted, PHS Act section2705(j) largely adopts the wellness

program provisions of the 2006regulations with some modification andclarification. Consistent with thestatutory approach, these proposedregulations would apply the rules ofPHS Act section 2705, governingrewards for adherence to certainwellness programs, to grandfatheredhealth plans by regulation underauthority in the HIPAAnondiscrimination and wellnessprovisions as was done in the 2006regulations. This approach is intendedto avoid inconsistency across grouphealth coverage and to provide

grandfathered plans the same flexibilityto promote health and prevent diseaseas non-grandfathered plans.

II. Overview of the Proposed Rule

These regulations generally proposestandards for group health plans andhealth insurance issuers offering grouphealth insurance coverage with respectto wellness programs. These proposedregulations would replace the wellnessprogram provisions of paragraph (f) ofthe 2006 regulations and would apply to

both grandfathered and non-grandfathered group health plans andgroup health insurance coverage for

plan years beginning on or after January1, 2014. These regulations also proposeto implement the nondiscriminationprovisions made applicable to theindividual market by section 1201 of the

Affordable Care Act. This rulemakingdoes not propose to modify provisionsof the 2006 regulations other thanparagraph (f).

A. Two Categories of Wellness Programs

Consistent with the 2006 regulationsand PHS Act section 2705(j), theseproposed regulations would continue to

divide wellness programs into twocategories: Participatory wellnessprograms, which are a majority ofwellness programs (as noted below) andhealth-contingent wellness programs.Participatory wellness programs areprograms that are made available to allsimilarly situated individuals and thateither do not provide a reward or do notinclude any conditions for obtaining areward that are based on an individualsatisfying a standard that is related to ahealth factor. Several examples ofparticipatory wellness programs areprovided in these proposed regulations,including: (1) A program thatreimburses for all or part of the cost ofmembership in a fitness center; and (2)a program that provides a reward toemployees for attending a monthly, no-cost health education seminar.Participatory programs are not requiredto meet the five requirements applicableto health-contingent wellness programs.

In contrast, health-contingentwellness programs require an individualto satisfy a standard related to a healthfactor to obtain a reward (or require anindividual to do more than a similarlysituated individual based on a healthfactor in order to obtain the same

reward). Like the 2006 regulations, theseproposed regulations would continue topermit rewards to be in the form of adiscount or rebate of a premium orcontribution, a waiver of all or part ofa cost-sharing mechanism (such asdeductibles, copayments, orcoinsurance), the absence of asurcharge, the value of a benefit thatotherwise would not be provided underthe plan, or other financial ornonfinancial incentives ordisincentives. Examples of health-contingent wellness programs in theseproposed regulations are: (1) A program

that imposes a premium surchargebased on tobacco use; and (2) a programthat uses a biometric screening or ahealth risk assessment to identifyemployees with specified medicalconditions or risk factors (such as highcholesterol, high blood pressure,abnormal body mass index, or highglucose level) and provides a reward toemployees identified as within a normalor healthy range (or at low risk forcertain medical conditions), whilerequiring employees who are identifiedas outside the normal or healthy range

(or at risk) to take additional steps (suchas meeting with a health coach, takinga health or fitness course, adhering to ahealth improvement action plan, orcomplying with a health care providersplan of care) to obtain the same reward.Under paragraphs (b)(2)(ii) and (c)(3) ofthe 2006 regulations (which remainunchanged),11 health-contingentwellness programs are permissible onlyif they comply with the provisions ofparagraph (f)(3), which are proposed to

be amended in this rulemaking.12

The Departments believe thatappropriately designed wellnessprograms have the potential tocontribute importantly to promotinghealth and preventing disease. Evenafter the issuance of the 2006regulations and the enactment of theAffordable Care Act wellnessprovisions, however, stakeholderfeedback suggests that there continues

to be a degree of confusion regarding thescope of the rules governing wellnessprograms. The Departments hope thatthese proposed regulations will helpdispel the confusion by reiterating thatthe five regulatory requirements relatingto frequency of opportunity to qualify,size of reward, uniform availability andreasonable alternative standards,reasonable design, and notice of othermeans of qualifying for the reward(summarized below and contained inparagraph (f)(3) of the proposedregulations) apply only to thosewellness programs that meet thedefinition of health-contingentprograms. As discussed above, these arewellness programs that both provide areward and condition the reward onsatisfying a standard that is related to ahealth factor. Many wellness programs(those characterized in these regulationsas participatory wellness programs)do not both provide a reward andcondition the reward on satisfying astandard that is related to a healthfactor. Accordingly, as noted,participatory wellness programs are notrequired to meet the five enumerated

requirements applicable to health-contingent wellness programs, but theyare required to be made available to allsimilarly situated individuals.



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13See 71 FR at 75018.

14Small group market means the health insurancemarket under which individuals obtain healthinsurance coverage (directly or through anyarrangement) on behalf of themselves (and theirdependents) through a group health planmaintained by a small employer. See PHS Actsection 2791(e)(5); 45 CFR 144.103. For plan years

beginning on or after January 1, 2014, amendmentsmade by the Affordable Care Act provide that theterm small employer means, in connection witha group health plan with respect to a calendar yearand a plan year, an employer who employed anaverage of at least 1 but not more than 100employees on business days during the precedingcalendar year and who employs at least 1 employeeon the first day of the plan year. See PHS Actsection 2791(e)(4). In the case of plan yearsbeginning before January 1, 2016, a State may electto substitute 50 employees for 100 employeesin its definition of a small employer. See section1304(b)(3) of the Affordable Care Act.

B. Requirements for Health-ContingentWellness Programs

Consistent with the 2006 regulations,these proposed regulations generallywould maintain the five requirementsfor health-contingent wellness programswith one significant modificationrelating to the size of the reward. In

addition, several regulatory provisionshave been re-ordered, and clarificationsare proposed to address questions andissues raised by stakeholders since the2006 regulations were issued and to beconsistent with the amendments made

by the Affordable Care Act, as discussedbelow.

(1) Frequency of Opportunity toQualify.

These proposed regulations would,consistent with the 2006 regulations andthe amendments made by the AffordableCare Act, require health-contingentwellness programs to give individualseligible for the program the opportunity

to qualify for the reward at least onceper year. As stated in the preamble tothe 2006 regulations, the once-per-yearrequirement was included as a bright-line standard for determining theminimum frequency that is consistentwith a reasonable design for promotinggood health or preventing disease.13

(2) Size of Reward.Like the 2006 regulations, these

proposed regulations would continue tolimit the total amount of the reward forhealth-contingent wellness programswith respect to a plan, whether offeredalone or coupled with the reward for

other health-contingent wellnessprograms. Specifically, the total rewardoffered to an individual under anemployers health-contingent wellnessprograms could not exceed a specifiedpercentage (referred to as theapplicable percentage in the proposedregulations) of the total cost ofemployee-only coverage under the plan,taking into account both employer andemployee contributions towards the costof coverage. If, in addition to employees,any class of dependents (such asspouses, or spouses and dependentchildren) may participate in the health-

contingent wellness program, thereward could not exceed the applicablepercentage of the total cost of thecoverage in which the employee andany dependents are enrolled (such asfamily coverage or employee-plus-onecoverage).

Some stakeholders have raisedquestions about health-contingentwellness programs that allowdependents to participate, and whatportion of the reward should be

attributable to each participatingdependent. If a class of dependents mayparticipate in a health-contingentwellness program, some have suggestedthat there be a maximum rewardattributable to the employeesparticipation in the wellness program,such as an amount that does not exceedthe applicable percentage of the cost of

employee-only coverage. The proposedregulation being issuedcontemporaneously by HHS proposesthat, to comply with PHS Act section2701, with respect to family coverage,any premium variation for tobacco usemust be applied to the portion ofpremium attributable to each familymember. The Departments invitecomments on apportionment of rewardsin health-contingent wellness programs(which may involve tobacco use and/orother health factors)for example,should the reward be prorated if onlyone family member fails to qualify for it.

The 2006 regulations specify 20percent as the maximum permissiblereward for participation in a health-contingent wellness program. PHS Actsection 2705(j)(3)(A), effective for planyears beginning on or after January 1,2014, increases the maximum reward to30 percent and authorizes theDepartments to increase the maximumreward to as much as 50 percent if theDepartments determine that such anincrease is appropriate. In theseproposed regulations, the increase in theapplicable percentage from 20 percentto 30 percent, which is effective for planyears beginning on or after January 1,

2014, conforms to the new PHS Actsection 2705(j)(3)(A). In addition, theDepartments have determined that anincrease of an additional 20 percentagepoints (to 50 percent) for health-contingent wellness programs designedto prevent or reduce tobacco use iswarranted to conform to the new PHSAct section 2701, to avoid inconsistencyacross group health coverage, whetherinsured or self-insured, or offered in thesmall group or large group market, andto provide grandfathered plans the sameflexibility to promote health andprevent disease as non-grandfathered

plans.Specifically, PHS Act section 2701,the fair health insurance premiumprovision, sets forth the factors thatissuers may use to vary premium ratesin the individual or small groupmarket.14 PHS Act section

2701(a)(1)(A)(iv) provides that issuers inthe individual and small group marketscannot vary rates for tobacco use bymore than a ratio of 1.5 to 1 (that is,allowing up to a 50 percent premiumsurcharge for tobacco use).Contemporaneously with thepublication of these proposed wellnessprogram regulations, HHS is publishing

a proposed regulation that wouldimplement PHS Act section 2701. HHSproposes that a health insurance issuerin the small group market would be ableto implement the tobacco use surchargeunder PHS Act section 2701 toemployees only in connection with awellness program meeting the standardsof PHS Act section 2705(j) and itsimplementing regulations. As discussedin the preamble to the proposedregulation implementing PHS Actsection 2701, HHS is proposing in thatrule that the definition of tobacco usefor purposes of section 2701 be

consistent with the approach taken withrespect to health-contingent wellnessprograms designed to prevent or reducetobacco use under section 2705(j).Comments are solicited in the preambleto the proposed rules implementingsection 2701 on possible definitions oftobacco use that would be applied forpurposes of PHS Act sections 2701 and2705(j).

To coordinate these proposedregulations with the tobacco use ratingprovisions of PHS Act section 2701, asproposed by HHS, these proposedwellness program regulations would usethe new authority in PHS Act section2705(j)(3)(A) (and, with respect tograndfathered health plans, thepreexisting authority in the HIPAAnondiscrimination and wellnessprovisions) to increase the applicablepercentage for determining the size ofthe reward for participating in a health-contingent wellness program by anadditional 20 percentage points (to 50percent) to the extent that the additionalpercentage is attributed to tobacco useprevention or reduction. Applying theseproposed regulations to all group healthplans would provide consistency acrossmarkets, giving large, self-insured, and

grandfathered employment-based health



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15See 71 FR 75019.16 Id.17As stated in the preamble to the Departments

regulations on internal claims and appeals andexternal review processes, adverse benefitdeterminations based on whether a participant orbeneficiary is entitled to a reasonable alternativestandard for a reward under a plans wellnessprogram are situations in which a claim isconsidered to involve medical judgment and

therefore is eligible for Federal external review. See76 FR 37216.

plans the same added flexibility topromote tobacco-free workforces assmall, insured, non-grandfatheredhealth plans.

Examples included in these proposedregulations illustrate how to calculatethe applicable percentage. TheDepartments invite comments on theproposed approach in general and other

ideas for coordinating theimplementation of the tobacco ratingfactor under PHS Act section 2701 withthe nondiscrimination and wellnessprogram provisions. The Departmentsalso invite comments as to whetheradditional rules or examples would behelpful to demonstrate compliance withthe limitation on the size of the rewardwhen the amount of the reward isvariable and is not determinable at thetime the reward is established (forexample, when the reward is waiver ofa copayment for outpatient office visits,the frequency of which will not be

predictable for any particularparticipant or beneficiary under theplan).

(3) Uniform Availability andReasonable Alternative Standards.

A critical element of these proposedregulations is the requirement that thereward under a health-contingentwellness program be available to allsimilarly situated individuals. To meetthis requirement, a reasonablealternative standard (or waiver of theotherwise applicable standard) forobtaining the reward must be providedfor any individual for whom, for thatperiod, it is either unreasonably difficult

due to a medical condition to meet theotherwise applicable standard, or forwhom it is medically inadvisable toattempt to satisfy the otherwiseapplicable standard. That is, the same,full reward must be available toindividuals who qualify by satisfying areasonable alternative standard as isprovided to individuals who qualify bysatisfying the programs otherwiseapplicable standard. These proposedregulations would generally reiterate therequirements set forth in the 2006regulations and codified in PHS Actsection 2705(j), and provide several

additional clarifications.First, under these proposedregulations, as under the 2006regulations, in lieu of providing areasonable alternative standard, a planor issuer may always waive theotherwise applicable standard andprovide the reward. The plan or issuermay waive the otherwise applicablestandard and provide a reward for anentire class of individuals or may do soon an individual-by-individual basis

based on the facts and circumstancespresented.

Second, these proposed regulationswould not require plans and issuers toestablish a particular alternativestandard in advance of an individualsspecific request for one. However, areasonable alternative standard wouldhave to be provided by the plan orissuer (or the condition for obtaining thereward would be required to be waived)

upon an individuals request. In thisconnection, the Departments note that,as stated in the preamble to the 2006regulations with respect to tobaccocessation, overcoming an addictionsometimes requires a cycle of failureand renewed effort. 15 Plans andissuers cannot cease to provide areasonable alternative standard merely

because one was not successful before;they must continue to offer a reasonablealternative standard, whether it is thesame standard or a new reasonablealternative standard (such as a newweight-loss class or a new nicotine

replacement therapy).16

All the facts and circumstances wouldbe taken into account in determiningwhether a plan or issuer has provideda reasonable alternative standard,including but not limited to thefollowing proposed factors:

If the reasonable alternativestandard is completion of aneducational program, the plan or issuermust make the educational programavailable instead of requiring anindividual to find such a programunassisted, and may not require anindividual to pay for the cost of the

program. If the reasonable alternativestandard is a diet program, the plan orissuer is not required to pay for the costof food but must pay any membershipor participation fee.

If the reasonable alternativestandard is compliance with therecommendations of a medicalprofessional who is an employee oragent of the plan or issuer, and anindividuals personal physician statesthat the medical professionalsrecommendations are not medicallyappropriate for that individual, the planor issuer must provide a reasonable

alternative standard that accommodatesthe recommendations of the individualsphysician with regard to medicalappropriateness.17 Plans and issuers

may impose standard cost sharing underthe plan or coverage for medical itemsand services furnished in accordancewith the physicians recommendations.

The Departments intend that theseclarifications with respect to offeringreasonable alternative standards willhelp prevent health-contingent wellnessprograms that provide little to no

support to enrollees to improveindividuals health. In addition, asexplained later in this preamble,clarifications are proposed to ensurethat a health-contingent wellnessprogram is reasonably designed toimprove health and is not a subterfugefor underwriting or reducing benefits

based on health status. Comments areinvited on these provisions, as well aswhether other facts and circumstancesshould be specifically addressed. Forexample, the Departments seekcomment on whether any additionalrules or clarifications are needed with

respect to the process for determining areasonable alternative standard.Finally, the 2006 regulations provided

that it is permissible for a plan or issuerto seek verification, such as a statementfrom the individuals personalphysician, that a health factor makes itunreasonably difficult for the individualto satisfy, or medically inadvisable forthe individual to attempt to satisfy, theotherwise applicable standard. TheAffordable Care Act amendmentscodified this provision with onemodification: PHS Act section2705(j)(3)(D)(ii) makes clear thatphysician verification may be required

by a plan or issuer if reasonable underthe circumstances. These proposedregulations clarify that it would not bereasonable for a plan or issuer to seekverification of a claim that is obviouslyvalid based on the nature of theindividuals medical condition that isknown to the plan or issuer. Plans andissuers are permitted under theproposed regulations to seek verificationof claims that require the use of medicaljudgment to evaluate. The Departmentssolicit comments on whether additionalclarifications would be helpfulregarding the reasonableness of

physician verification.(4) Reasonable Design.Consistent with the 2006 regulations

and PHS Act section 2705(j), theseproposed regulations would continue torequire that health-contingent wellnessprograms be reasonably designed topromote health or prevent disease, not

be overly burdensome, not be asubterfuge for discrimination based on ahealth factor, and not be highly suspect



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1871 FR 75018.1971 FR 75019.

in the method chosen to promote healthor prevent disease. The preamble to the2006 regulations stated that thereasonably designed standard wasdesigned to prevent abuse, butotherwise was intended to be an easystandard to satisfy * * *. There does notneed to be a scientific record that themethod promotes wellness to satisfy

this standard. The standard is intendedto allow experimentation in diverseways of promoting wellness. 18 Thepreamble also stated that theDepartments did not want plans andissuers to be constrained by a narrowrange of programs * * * but want plansand issuers to feel free to considerinnovative programs for motivatingindividuals to make efforts to improvetheir health. 19 These proposedregulations would continue to provideplans and issuers flexibility andencourage innovation. Also, asdiscussed later in this preamble, the

regulations include several clarificationsto ensure against subterfuge anddiscrimination. Comments are welcomeon whether certain standards, includingevidence- or practice-based standards,are needed to ensure that wellnessprograms are reasonably designed topromote health or prevent disease. TheDepartments also welcome commentson best practices guidance regardingevidence- and practice-based strategiesin order to increase the likelihood ofwellness program success. Resources foremployers and plans include theHealthier Worksite Initiative of theCenters for Disease Control and

Prevention (CDC) at http://www.cdc.gov/nccdphp/dnpao/hwi/.

Under the proposed regulations, thedetermination of whether a health-contingent wellness program isreasonably designed is based on all therelevant facts and circumstances. Toensure that programs are not asubterfuge for discrimination orunderwriting based on health factorssuch as weight, blood pressure, glucoselevels, cholesterol levels, or tobacco usewith no or insufficient support toimprove individuals health, theDepartments propose that, to the extent

a plans initial standard for obtaining areward (or a portion of a reward) isbased on results of a measurement, test,or screening that is related to a healthfactor (such as a biometric examinationor a health risk assessment), the plan isnot reasonably designed unless it makesavailable to all individuals who do notmeet the standard based on themeasurement, test, or screening adifferent, reasonable means of

qualifying for the reward. Accordingly,the general approach that was adoptedin the 2006 regulations is preserved,which allows plans and issuers toconduct screenings and employmeasurement techniques in order totarget wellness programs effectively. Forexample, plans and issuers could targetindividuals with high cholesterol for

participation in cholesterol reductionprograms, or individuals who usetobacco for participation in tobaccocessation programs, rather than theentire population of participants and

beneficiaries if individuals who do notmeet a plans target biometrics (orsimilar standards) are provided adifferent, reasonable means ofqualifying for the same reward. TheDepartments invite comments on thisapproach, including on ways to ensurethat employees will not be subjected toan unreasonable one-size-fits-allapproach to designing the different

means of qualifying for the reward thatwould fail to take an employeescircumstances into account to the extentthat, as a practical matter, they wouldmake it unreasonably difficult for theemployee to access those differentmeans of qualifying. Comments also areinvited on whether any other consumerprotections are needed to ensure thatwellness programs are reasonablydesigned to promote health or preventdisease.

(5) Notice of Other Means ofQualifying for the Reward.

These proposed regulations,consistent with the 2006 regulations and

the amendments made by the AffordableCare Act, would require plans andissuers to disclose the availability ofother means of qualifying for the rewardor the possibility of waiver of theotherwise applicable standard in allplan materials describing the terms of ahealth-contingent wellness program. Ifplan materials merely mention that aprogram is available, without describingits terms, this disclosure is not required.For example, a summary of benefits andcoverage (SBC) required under section2715 of the PHS Act that notes that costsharing may vary based on participation

in a diabetes wellness program, withoutdescribing the standards of the program,would not trigger this disclosure.

The 2006 regulations provided samplelanguage that could be used to satisfythis requirement in both the regulatorytext and in several examples. However,feedback and experience since the 2006regulations were published haveindicated that the sample language wascomplicated and confusing to someindividuals and may have led fewerindividuals to seek a reasonablealternative standard than were eligible.

Accordingly, these proposed regulationsprovide new sample language in theregulatory text and in examples that isintended to be simpler for individuals tounderstand and to increase thelikelihood that those who qualify for adifferent means of obtaining a rewardwill contact the plan or issuer to requestit. The Departments invite comment on

the sample language in both theregulatory text and in the examples.

C. Application to the Individual HealthInsurance Market

PHS Act sections 2705(a) and (b), asadded by section 1201 of the AffordableCare Act, apply the HIPAAnondiscrimination requirements tohealth insurance issuers in theindividual health insurance market.Accordingly, the HHS proposedregulations include a new 147.110which applies the nondiscriminationprotections of the 2006 regulations to

non-grandfathered, individual healthinsurance coverage, effective for policyyears beginning on or after January 1,2014. By their terms, the wellnessprogram provisions of PHS Act section2705(j), however, do not apply to healthinsurance coverage in the individualmarket. Accordingly, the wellnessprogram provisions of 146.121(f) applyonly to group health plans and grouphealth insurance coverage, notindividual market coverage.

D. Applicability Date

These proposed regulations wouldapply for plan years (in the individualmarket, policy years) beginning on orafter January 1, 2014, consistent withthe statutory effective date of PHS Actsection 2705, as well as PHS Act section2701. Comments are invited on thisproposed applicability date.

III. Economic Impact and PaperworkBurden

A. Executive Orders 12866 and 13563Department of Labor and Department ofHealth and Human Services

Executive Orders 12866 and 13563direct agencies to assess all costs and

benefits of available regulatoryalternatives and, if regulation isnecessary, to select regulatoryapproaches that maximize net benefits(including potential economic,environmental, public health and safetyeffects; distributive impacts; andequity). Executive Order 13563emphasizes the importance ofquantifying both costs and benefits,reducing costs, harmonizing rules, andpromoting flexibility. The Office ofManagement and Budget (OMB) hasdetermined that this proposed rule is a

http://www.cdc.gov/nccdphp/dnpao/hwi/http://www.cdc.gov/nccdphp/dnpao/hwi/http://www.cdc.gov/nccdphp/dnpao/hwi/http://www.cdc.gov/nccdphp/dnpao/hwi/


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20For a discussion of PHS Act section 2701 andthe HHS proposed regulation being publishedcontemporaneously with these proposedregulations, see section II.B.2. of this preamble.

significant regulatory action undersection 3(f)(4) of Executive Order 12866,

because it raises novel legal or policyissues arising from the Presidents

priorities. Accordingly, the rule hasbeen reviewed by the OMB.

TABLE 1Accounting Table

Benefits ................................ Quantified: Minimal due to low expected use of higher reward limits.Qualitative: Benefits include the ability to increase the reward based on a health factor to incentivize individuals to

meet a health standard associated with improved health, which could reduce health care costs. Improvedstandards could reduce the use of wellness programs as a subterfuge for discrimination based on a health fac-tor.

Costs .................................... Quantified: Minimal since employers are expected to create or expand wellness programs only if the expectedbenefit exceeds the cost as well as due to low expected use of higher reward limits.

Qualitative: Costs of the rule include clarifications regarding what costs individuals may pay as part of an alter-native means of complying with the health standard. To the extent an individual faces an increased cost for notmeeting a health standard, the individual would have reduced resources to use for other purposes.

Transfers .............................. Quantified: Minimal due to low expected use of higher reward limits.Qualitative: Transfers resulting from the rule include transfers from those who do not meet a health standard to

those who do meet the standard or the associated alternative standard.

Based on the Departments review ofthe most recent literature and studiesregarding wellness programs, theDepartments reached the conclusionthat the impact of the benefits, costs,

and transfers associated with theproposed rules will be minimal. Asdiscussed in this analysis, few health-contingent wellness programs todaycome close to meeting the 20 percentlimit (based on the data, the usualreward percentage ranges from three to11 percent); therefore, the Departmentsdo not believe that expanding the limitto 30 percent (or 50 percent forprograms designed to prevent or reducetobacco use) will result in significantlyhigher participation of employers insuch programs. The Departmentsprovide a qualitative discussion belowand cite the survey data used tosubstantiate this conclusion. Moreover,most wellness programs appear to beparticipatory programs that do notrequire an individual to meet a standardrelated to a health factor in order toobtain a reward. As stated earlier in thispreamble, these participatory wellnessprograms are not required to meet thefive requirements that apply to health-contingent wellness programs, but theyare required to be made available to allsimilarly situated individuals.

Although the Departments believe fewplans will expand the reward

percentage, the Departments provide aqualitative discussion regarding thesources of benefits, costs, and transfersthat could occur if plans were to expandthe reward beyond the currentmaximum of 20 percent. Currently,insufficient broad-based evidence makesit difficult to definitively assess theimpact of workplace wellness programson health outcomes and cost, although,overall, employers largely report thatworkplace wellness programs in general(participatory programs and health-contingent programs) are delivering on

their intended benefit of improvinghealth and reducing costs.

The one source of potential additionalcost discussed in the impact analysis isthe clarification that plans must provide

a reasonable alternative means ofsatisfying the otherwise applicablestandard. The Departments presentevidence that currently employers notonly allow a reasonable alternativestandard, but that most employersalready pay for these alternatives. TheDepartments do not have an estimate ofhow many plans are not currentlypaying for alternatives consistent withthe clarifications set forth in theproposed regulations, but the numberappears to be small. The Departmentsalso employ economic logic to concludethat employers will create or expand

their wellness program and providereasonable alternatives only if theexpected benefits exceed the expectedcosts. Therefore, the Departments

believe that the benefits of the proposedrule will justify the costs. TheDepartments invite comments on theseconclusions and request input forimproving the analysis, includingadditional data, surveys, or studies.

B. Background and Need for RegulatoryActionDepartment of Labor andDepartment of Health and HumanServices

As discussed earlier in this preamble,on December 13, 2006, the Departmentsissued joint final regulations regardingthe HIPAA nondiscrimination andwellness provisions. The 2006regulations set forth the requirementsfor wellness programs that provide areward to individuals who satisfy astandard related to a health factor orprovide a reward to individuals to domore than a similarly situatedindividual based on a health factor. Seesection I.B. of this preamble for adetailed discussion of the HIPAA

nondiscrimination and wellnessprovisions and the 2006 regulations.

PHS Act section 2705 largely reflectsthe provisions of the 2006 regulationswith some modification and

clarification. Most notably, it increasedthe maximum reward that can beprovided under a health-contingentwellness program from 20 percent to 30percent of the total cost of coverageunder the plan and authorized theDepartments to increase this percentageto as much as 50 percent of the total costof coverage under the plan, if theDepartments determine that such anincrease is appropriate. Accordingly, asdiscussed in section II.B of thispreamble, these proposed regulationsincrease the applicable percentage forthe maximum reward from 20 percent to

30 percent, with an additional increaseof 20 percentage points (to 50 percent)for health-contingent wellness programsdesigned to prevent or reduce tobaccouse. The additional increase iswarranted to conform to PHS Actsection 2701, to avoid inconsistencyacross group health coverage, whetherinsured or self-insured, or offered in thesmall group or large group market, andto provide grandfathered plans the sameflexibility to promote health andprevent disease as non-grandfatheredplans.20

C. Regulatory AlternativesDepartmentof Labor and Department of Health andHuman Services

As stated earlier in this preamble, the2006 regulations prescribed severalrequirements for health-contingentwellness programs, including alimitation on the maximum reward of20 percent of the total cost of coverage



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21See section I.B, earlier in this preamble.

22On behalf of the Departments, RANDresearchers did a review of the current literature onthis topic. A Review of the U.S. WorkplaceWellness Market February 2012. The report can befound at http://www.dol.gov/ebsa/pdf/workplacewellnessmarketreview2012.pdf.

23Kaiser Family Foundation, Employer HealthBenefits: 2011 Annual Survey. 2011, The KaiserFamily Foundation, Menlo Park, CA; HealthResearch & Educational Trust, Chicago, IL.

24Nyce, S. Boosting Wellness ParticipationWithout Breaking the Bank. TowersWatson Insider.July, 2010:19.


26Buck Consultants, Working Well: A GlobalSurvey of Health Promotion and WorkplaceWellness Strategies. 2010, Buck Consultants: SanFrancisco, CA.

under the plan.21 PHS Act section 2705largely reflects the requirements forwellness programs from the 2006regulations with some modification andclarification. Most notably, it increasedthe maximum reward that can beprovided under a health-contingentwellness program from 20 percent to 30percent of the total cost of coverage

under the plan and authorized theDepartments to increase this percentageto as much as 50 percent, if theDepartments determine that such anincrease is appropriate.

PHS Act section 2701(a)(1)(A)(iv)provides that issuers in the individualand small group markets cannot varyrates for tobacco use by more than aratio of 1.5 to 1 (that is, allowing up toa 50 percent rating factor for tobaccouse) for non-grandfathered plans. PHSAct section 2701 applies to theindividual market and the small groupmarket, but does not apply in the large

group market or to self-insured plans.Contemporaneously with thepublication of these proposedregulations, HHS is publishing aproposed rule that would provide thatan issuer in the small group marketwould not be able to impose the tobaccorating factor on an individual in theplan under PHS Act section 2701 unlessit was imposed as part of a wellnessprogram meeting the standards of PHSAct section 2705(j) and itsimplementing regulations.

An important policy goal of theDepartments is to provide the largegroup market and self-insured plans and

grandfathered health plans with thesame flexibility as non-grandfatheredplans in the small group market topromote tobacco-free workforces. TheDepartments considered severalregulatory alternatives to meet thisobjective, including the following:

(1) Stacking premium differentials.One alternative considered was topermit a 50 percent premiumdifferential for tobacco use in the smallgroup market under PHS Act section2701 without requiring a reasonablealternative standard. Under PHS Actsection 2705, an additional 30 percent

premium differential would also bepermitted if the five criteria for a health-contingent wellness program are met(including the offering of a reasonablealternative standard). Under this option,an 80 percent premium differentialwould have been allowable in the smallgroup market based on factors related tohealth status. Large and self-insuredplans would have been limited to the 30percent maximum reward. Allowingsuch a substantial difference between

what was permissible in the small groupmarket and the large group market wasnot in line with the Departments policygoal of providing consistency inflexibility for plans.

(2) Concurrent premium differentialswith no reasonable alternative requiredto be offered for tobacco use. Anotheralternative would be to read sections2701 and 2705 together such that, fornon-grandfathered health plans in thesmall group market, up to a 50 percentpremium differential would bepermitted based on tobacco use, asauthorized under PHS Act section2701(a)(1)(A)(iv), with no reasonablealternative standard required for thetobacco use program. With respect tonon-tobacco-related wellness programs,a reward could be offered only to theextent that a tobacco use wellnessprogram were less than 30 percent of thecost of coverage because the twoprovisions apply concurrently, and a

reward would not be permitted underPHS Act section 2705 if the maximumreward already were exceeded by virtueof PHS Act section 2701. Thus, the 50percent tobacco surcharge under PHSAct section 2701 would be availableonly to non-grandfathered, insured,small group plans. The chosen approachis intended to avoid inconsistency andto provide grandfathered plans the sameflexibility to promote health andprevent disease as non-grandfatheredplans.

D. Current Use of Wellness Programsand Economic ImpactsDepartment ofLabor and Department of Health andHuman Services

The current use of wellness programsand economic impacts of theseproposed regulations are discussed inthis analysis.

Wellness programs 22 have becomecommon among employers in theUnited States. The 2012 Kaiser/HRETsurvey indicates that 63 percent of allemployers who offered health benefitsalso offered at least one wellnessprogram.23 The uptake of wellnessprograms continues to be more common

among large employers. For example,the 2012 Kaiser/HRET survey found thathealth risk assessments are offered by 38percent of large employers offering

health benefits, but only 18 percent ofemployers with fewer than 200 workers.

The Kaiser/HRET survey indicatesthat 29 percent of all firms and 53percent of large firms offered weightloss programs, while 30 percent and 64percent, respectively, offered gymmemberships or on-site exercisefacilities. Meanwhile, 32 percent of all

employers and 63 percent of largeemployers offered smoking cessationresources. Despite widespreadavailability, actual participation ofemployees in wellness programsremains limited. While no nationallyrepresentative data exist, a 2010 non-representative survey suggests thattypically less than 20 percent of eligibleemployees participate in wellnessinterventions such as smokingcessation.24

Currently, insufficient broad-basedevidence makes it difficult todefinitively assess the impact ofworkplace wellness on health outcomesand cost. Yet, overall, employers largelyreport that workplace wellnessprograms are delivering on theirintended benefit of improving healthand reducing costs. According to the2011 Kaiser/HRET survey, 65 percent ofrespondents that offered wellnessprograms stated that these programsimproved employee health, and 53percent believed that they reducedcosts. Larger firms (defined as thosewith more than 200 workers in theKaiser/HRET survey) were significantlymore positive, as 74 percent affirmedthat workplace wellness programs

improved health and 65 percent saidthat it reduced cost, as opposed to 65percent and 52 percent, respectively,among smaller firms.25 Forty percent ofrespondents to a survey by BuckConsultants indicated that they hadmeasured the impact of their wellnessprogram on the growth trend of theirhealth care costs, and of these, 45percent reported a reduction in thatgrowth trend. The majority of theseemployers, 61 percent, reported that thereduction in growth trend of their healthcare costs was between two and fivepercentage points per year.26 There are

numerous accounts of the positiveimpact of workplace wellness programsin many industries, regions, and typesof employers. For example, a recent

http://www.dol.gov/ebsa/pdf/workplacewellnessmarketreview2012.pdfhttp://www.dol.gov/ebsa/pdf/workplacewellnessmarketreview2012.pdfhttp://www.dol.gov/ebsa/pdf/workplacewellnessmarketreview2012.pdfhttp://www.dol.gov/ebsa/pdf/workplacewellnessmarketreview2012.pdf


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27Berry, L., A. Mirabito, and W. Baun, Whats theHard Return on Employee Wellness Programs?Harvard Business Review, 2010. 88(12): p. 104.

28Heirich, M. and C.J. Sieck, Worksitecardiovascular wellness programs as a route tosubstance abuse prevention. J Occup Environ Med,2000. 42(1): p. 4756; 40; McMahon, S.D. and L.A.Jason, Social support in a worksite smokingintervention. A test of theoretical models. BehavModif, 2000. 24(2): p. 184201; Okechukwu, C.A.,et al., MassBuilt: Effectiveness of an apprenticeshipsite-based smoking cessation intervention forunionized building trades workers. Cancer CausesControl, 2009. 20(6): p. 88794; Sorensen, G., et al.,A comprehensive worksite cancer preventionintervention: Behavior change results from arandomized controlled trial (United States). J PublicHealth Policy, 2003. 24(1): p. 525.

29Gold, D.B., D.R. Anderson, and S.A. Serxner,Impact of a telephone-based intervention on thereduction of health risks. Am J Health Promot,2000. 15(2): p. 97106; Herman, C.W., et al.,Effectiveness of an incentive-based online physicalactivity intervention on employee health status.Journal of Occupational and EnvironmentalMedicine, 2006. 48(9): p. 889895; Ozminkowski,R.J., et al., The impact of the Citibank, NA, healthmanagement program on changes in employeehealth risks over time.J Occup Environ Med, 2000.42(5): p. 50211.

30Heirich, M. and C.J. Sieck, Worksitecardiovascular wellness programs as a route tosubstance abuse prevention. J Occup Environ Med,2000. 42(1): p. 4756; McMahon, S.D. and L.A.Jason, Social support in a worksite smokingintervention. A test of theoretical models. BehavModif, 2000. 24(2): p. 184201.

31Heirich, M. and C.J. Sieck, Worksitecardiovascular wellness programs as a route tosubstance abuse prevention. J Occup Environ Med,2000. 42(1): p. 4756; Okechukwu, C.A., et al.,MassBuilt: Effectiveness of an apprenticeship site-based smoking cessation intervention for unionizedbuilding trades workers. Cancer Causes Control,2009. 20(6): p. 88794.

32 In the study, 42% of participants reduced theirrisk for tobacco use. See Gold, D.B., D.R. Anderson,and S.A. Serxner, Impact of a telephone-basedintervention on the reduction of health risks. AmJ Health Promot, 2000. 15(2): p. 97106.

33Kechukwu, C.A., et al., MassBuilt:Effectiveness of an apprenticeship site-basedsmoking cessation intervention for unionizedbuilding trades workers. Cancer Causes Control,

2009. 20(6): p. 88794.34Buck Consultants, Working Well: A Global

Survey of Health Promotion and WorkplaceWellness Strategies. 2010, Buck Consultants: SanFrancisco, CA.

35Mercer, National Survey of Employer-Sponsored Health Plans: 2009 Survey Report. 2010,Mercer.

36 Employer Survey on Purchasing Value inHealth Care, 17th Annual Towers Watson/NationalBusiness Group on Health Employer Survey onPurchasing Value in Health Care.

37 Guidance for a Reasonably Designed,Employer-Sponsored Wellness Program UsingOutcomes-Based Incentives, joint consensusstatement of the Health Enhancement Research

Organization, American College of Occupationaland Environmental Medicine, American CancerSociety and American Cancer Society CancerAction Network, American Diabetes Association,and American Heart Association.


article published by the HarvardBusiness Reviewcited positiveoutcomes reported by private-sectoremployers along several differentdimensions, including health caresavings, reduced absenteeism, andemployee satisfaction.27

Several studies that looked at theimpact of smoking cessation programs

found significantly higher quit rates orless tobacco use.28 29 Smoking cessationprograms typically offered educationand counseling to increase socialsupport.30 Two studies reported thatindividuals in the intervention groupquit smoking at a rate approximately 10percentage points higher than those inthe control group, and another reportedthat participants were almost four timesas likely as nonparticipants to reducetobacco use.31 32 However, these effectsshould be interpreted with caution. Onestudy showed significant differences insmoking rates at a one-month follow-up,

but showed no significant differences inquit rates at six months, highlighting theimportance of long-term follow-up to

investigate the sustainability ofresults.33

While employer sponsors generallyare satisfied with the results, more thanhalf stated in a recent survey that theydo not know their programs return oninvestment.34 The peer-reviewedliterature, while predominantlypositive, covers only a small proportion

of the universe of programs, limiting thegeneralizability of the reported findings.Evaluating such complex interventionsis difficult and poses substantialmethodological challenges that caninvalidate findings.

Overall, surveys suggest that arelatively small percentage of employersuse incentives, dollar or otherwise, forwellness programs, although incentiveuse is more prevalent among largeremployers. Data from the 2011 Kaiser/HRET Survey of Employer HealthBenefits indicate that 14 percent of allemployers offered cash, gift cards,

merchandise, or travel as incentives forwellness program participation. Amonglarge firms (greater than 200 workers),only 27 percent offered these kinds ofincentives. Mercer Consultings 2009National Survey of Employer-SponsoredHealth Plans found similar patterns,estimating that six percent of all firmsand 21 percent of those with 500 ormore employees provided financialincentives for participating in at leastone program.35 Employers are alsolooking to continue to add incentives totheir wellness programs, for example 17percent intend to add a reward orpenalty based on tobacco-use status.36The use of incentives to promoteemployee engagement remains poorlyunderstood, so it is not clear how type(e.g., cash or non-cash), direction(reward versus penalty), and strength ofincentive are related to employeeengagement and outcomes. The HealthEnhancement Research Organizationand associated organizations alsorecognized this deficiency and providedseven questions for future research.37

There are also no data on potentialunintended effects, such asdiscrimination against employees basedon their health or health behaviors.

Currently, the most commonlyincentivized program appears to beassociated with completion of a healthrisk assessment. According to the 2009Mercer survey, 10 percent of all firms

and 23 percent of large employers thatoffered a health risk assessmentprovided an incentive for completingthe assessment. For other types of healthmanagement programs that the surveyassessed, only two to four percent of allemployers and 13 to 19 percent of largeemployers offered incentives.38 The2011 Kaiser/HRET survey found that 10percent of all employers and 42 percentof large firms that offered a health riskassessment provided a financialincentive to employees who completedit.

Incentives are offered in a variety offorms, such as cash, gift cards,merchandise, time off, awards,recognition, raffles or lotteries, reducedhealth plan premiums and co-pays, andcontributions to flexible spending orhealth savings accounts. As notedpreviously, the Kaiser/HRET 2011survey reported that among firmsoffering health benefits with more than200 workers, 27 percent offered cash orcash equivalent incentives (includinggift cards, merchandise, or travelincentives). In addition, 11 percent ofthese firms offered lower employeehealth plan premiums to wellnessparticipants, two percent offered lower

deductibles, and 11 percent offeredhigher health reimbursement account orhealth savings account contributions.Meanwhile, 13 percent of firms withfewer than 200 workers offered cash orequivalent incentives, and each of theother types of incentives were offered byonly two percent or less of firms.

Cash and cash-equivalent incentivesremain the most popular incentive forcompletion of a health risk assessment.The Kaiser/HRET 2011 survey reportsthat among employers incentivizingcompletion of a health risk assessment,41 percent offered cash, gift cards,

merchandise or travel, 23 percentallowed workers to pay a smallerproportion of premiums, 12 percentoffered lower deductibles, and onepercent offered lower coinsurance.Among large employers, 57 percent



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40TowersWatson, Raising the Bar on Health Care:Moving Beyond Incremental Change.


42Linnan, L., et al., Results of the 2004 nationalworksite health promotion survey. AmericanJournal of Public Health, 2008. 98(8): p. 15031509.

43Kaiser Family Foundation, Employer HealthBenefits: 2010 Annual Survey.

44See section II.B, earlier in this preamble for amore detailed discussion of these requirements.

utilized cash incentives, 34 percentoffered smaller premiums, six percentprovided lower deductibles, and threepercent provided lower coinsurance.Findings from Mercers 2009 surveysuggest similar trends, with five percentof all employers and ten percent ofthose with 500 or more workersproviding cash incentives forcompletion of a health risk assessment;one percent and two percent,respectively, offering lower cost sharing;and two percent and seven percent,respectively, offering lower premiumcontributions.39 Note that in the Mercersurvey, the results cited reflect theincentives provided by all firms thatoffer a health risk assessment, while theKaiser/HRET results previouslymentioned reflect only firms thatincentivize completion of a health riskassessment.

Incentives may be triggered by a range

of different levels of employeeengagement. The simplest incentives aretriggered by program enrollmentthatis, by merely signing up for a wellnessprogram. At the next level, incentivesare triggered by program participationfor instance, attending a class orinitiating a program, such as a smokingcessation intervention. Other incentiveprograms may require completion of aprogram, whether or not any particularhealth-related goals are achieved, toearn an incentive. The health-contingentincentive programs require successfullymeeting a specific health outcome (or an

alternative standard) to trigger anincentive, such as verifiably quittingsmoking. There is little representativedata indicating the relative prevalenceof these different types of triggers. Themost common form of outcome-basedincentives is reportedly awarded forsmoking cessation. The 2010 survey byNBGH and TowersWatson indicatedthat while 25 percent of respondingemployers offered a financial incentivefor employees to become tobacco-free,only four percent offered financialincentives for maintaining a BMI withintarget levels, three percent did so for

maintaining blood pressure withintargets, and three percent formaintaining targeted cholesterollevels.40

The value of incentives can varywidely. Estimates from representativesurveys of the average value ofincentives per year range between

$152 41 and $557,42 or between threeand 11 percent of the $5,049 averagecost of individual coverage in 2010,43among employees who receive them.This suggests that companies typicallyare not close to reaching the 20 percentof the total cost of coverage thresholdset forth in the 2006 regulations. Thesefindings indicate that based on currently

available data, increasing the maximumreward for particpating in a health-contingent wellness program to 30percent (and the Departments decisionto propose an additional 20 percentagepoints for programs designed to preventor reduce tobacco use) is unlikely tohave a significant impact. Additionally,as discussed earlier in this preamble,today most incentive-based wellnessprograms are associated withcompletion of a health risk assessmentirrespective of the results, and thereforeare not subject to the limitation, becausesuch programs are not health-contingent

wellness programs.The Departments lack sufficientinformation to assess how firms thatcurrently are at the 20 percent limit willrespond to the increased limits andwelcome public comments regardingthis issue. If firms already viewed thecurrent 20 percent reward limit assufficient, then the Depatments wouldnot expect that increasing the limitwould provide an incentive for programdesign changes.

It is possible that the increasedwellness program reward limits willincentivize firms without health-contingent wellness programs toestablish them. The Departments,however, do not expect a significantnumber of new programs to be createdas a result of this change because firmswithout health-contingent wellnessprograms could already have providedrewards up to the 20 percent limit

before the enactment of the AffordableCare Act, but did not.

Two critical elements of theseproposed regulations are (1) thestandard that the reward under a health-contingent wellness program beavailable to all similarly situatedindividuals and (2) the standard that a

program be reasonably designed topromote health or prevent disease.44

As discussed earlier in this preamble,the regulation does not prescribe a

particular type of alternative standardthat must be provided. Instead, itpermits plan sponsors flexibility toprovide any reasonable alternative. TheDepartments expect that plan sponsorswill select alternatives that entail theminimum net costs (or, stateddifferently, the maximum net benefits)that are possible to achieve derive

offsetting benefits, such as a highersmoking cessation success rate.

It seems reasonable to presume thatthe net cost plan sponsors will incur inthe provision of alternatives, includingtransfers as well as new economic costsand benefits, will not exceed thetransfer cost of waiving surcharges forall plan participants who qualify foralternatives. The Departments expectthat many plan sponsors will find morecost effective ways to satisfy thisrequirement, should they exercise theoption to provide incentives through ahealth-contingent wellness program and

that the true net cost to them willtherefore be much smaller than thetransfer cost of waiving surcharges forall plan participants who qualify foralternatives. The Departments have no

basis for estimating the magnitude of thecost of providing alternative standardsor of potential offsetting benefits,however, and therefore solicitcomments from the public on thisquestion.

The Departments note that plansponsors will have strong motivation toidentify and provide alternativestandards that have positive neteconomic effects. Plan sponsors will be

disinclined to provide alternatives thatundermine their overall wellnessprogram and worsen behavioral andhealth outcomes, or that make financialrewards available absent meaningfulefforts by participants to improve theirhealth habits and overall health. Insteadplan sponsors will be inclined toprovide alternatives that sustain orreinforce plan participants incentive toimprove their health habits and overallhealth, and/or that help participantsmake such improvements. It thereforeseems likely that gains in economicwelfare from this requirement will equal

or outweigh losses. The Departmentsintend that the requirement to providereasonable alternatives will reduceinstances where wellness programsserve only to shift costs to higher riskindividuals and increase instanceswhere programs succeed at helping highrisk individuals improve their health.The Departments solicit comments onits assumption.

In considering the transfers that mightderive from the availability of (andparticipants satisfaction with)alternative means of qualifying for the



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45Under ERISA section 104(a)(2), the Secretarymay also provide exemptions or simplifiedreporting and disclosure requirements for pensionplans. Pursuant to the authority of ERISA section104(a)(3), the Department of Labor has previouslyissued at 29 CFR 2520.10420, 2520.10421,2520.10441, 2520.10446, and 2520.104b10certain simplified reporting provisions and limitedexemptions from reporting and disclosurerequirements for small plans, including unfundedor insured welfare plans, that cover fewer than 100participants and satisfy certain other requirements.


reward, the transfers arising from thisrequirement may take the form oftransfers to participants who satisfy newalternative wellness program standardsfrom plan sponsors, to such participantsfrom other participants, or somecombination of these. The existence ofa wellness program with a rewardcontingent on meeting a standard

related to a health factor creates atransfer from those who do not meet thestandard to those who do meet thestandard. Allowing individuals to meetan alternative standard to receive thereward is a transfer to those who use thealternative standard from everyone elsein the risk pool.

The reward associated with thewellness program is an incentive toencourage individuals to meet healthstandards associated with better orimproved health, which in turn isassociated with lower health care costs.If the rewards are effective, health care

costs will be reduced as an individualshealth improves. Some of these lowerhealth care costs could translate intolower premiums paid by employers andemployees, which could offset some ofthe transfers. To the extent largerrewards are more effective at improvinghealth and lowering costs, theseproposed regulations would producemore benefits than the currentregulations.

Rewards also could create costs toindividuals and to the extent the newlarger rewards create more costs thansmaller rewards, these proposedregulations could increase the costs

relative to the existing regulations. Tothe extent an individual does not meeta standard or satisfy an alternativestandard, they could face higher costs,for example in the case of a surchargefor smoking they could face up to a 50percent increase in their premiums.

Based on the foregoing discussion, theDepartments expect the benefits, costs,and transfers associated with theseproposed regulations to be minimal.However, the Departments are not ableto provide aggregate estimates, becausethey do not have sufficent data toestimate the number of plans that will

take advantage of the new limits.E. Regulatory Flexibility ActDepartment of Labor and Department ofHealth and Human Services

The Regulatory Flexibility Act (5U.S.C. 601 et seq.) (RFA) applies to mostFederal rules that are subject to thenotice and comment requirements ofsection 553(b) of the AdministrativeProcedure Act (5 U.S.C. 551 et seq.).Unless an agency certifies that such arule will not have a significanteconomic impact on a substantial

number of small entities, section 603 ofthe RFA requires the agency to presentan initial regulatory flexibility analysisat the time of the publication of thenotice of proposed rulemakingdescribing the impact of the rule onsmall entities. Small entities includesmall businesses, organizations andgovernmental jurisdictions.

For purposes of analysis under theRFA, the Departments propose tocontinue to consider a small entity to bean employee benefit plan with fewerthan 100 participants. The basis of thisdefinition is found in section 104(a)(3)of ERISA, which permits the Secretaryof Labor to prescribe simplified annualreports for welfare benefit plans thatcover fewer than 100 participants.45

Further, while some large employersmay have small plans, in general, smallemployers maintain most small plans.Thus, the Departments believe thatassessing the impact of these proposedregulations on small plans is anappropriate substitute for evaluating theeffect on small entities.

The definition of small entityconsidered appropriate for this purposediffers, however, from a definition ofsmall business that is based on sizestandards promulgated by the SmallBusiness Administration (SBA) (13 CFR121.201) pursuant to the Small BusinessAct (15 U.S.C. 631 et seq.). TheDepartments therefore requestcomments on the appropriateness of thesize standard used in evaluating theimpact of these proposed regulations onsmall entities. The Departments have

consulted with the SBA Office ofAdvocacy concerning use of thisparticipant count standard for RFApurposes. See 13 CFR 121.902(b)(4).

The Departments expect that theseproposed regulations will affect fewsmall plans. While a large number ofsmall plans offer a wellness program,the 2011 Kaiser/HRET survey reportedthat only 13 percent of employers withfewer than 200 employees had awellness program that offered cash orcash equivalent incentives (includinggift cards, merchandise, or travelincentives).46 In addition, only two

percent of these firms offered loweremployee health plan premiums towellness participants, one percentoffered lower deductibles, and onepercent offered higher healthreimbursement account or healthsavings account contributions.Therefore, the Departments expect thatfew small plans will be affected by

increasing the rewards threshold from20 percent to 30 percent (50 percent forprograms targeting tobacco useprevention or reduction), because asmall percentage of plans have rewards-

based wellness programs. Moreover, asdiscussed in the Economic Impactssection earlier in this preamble, fewplans that offer rewards-based wellnessprograms come close to reaching the 20percent limit, and most incentive-basedwellness programs are associated withcompleting the health risk assessmentirrespective of the results, which are notsubject to the limitation.

The Kaiser/HRET survey also reportsthat about 88 percent of small plans hadtheir wellness programs provided by thehealth plan provider. Industry expertsindicated to the Departments that whenwellness programs are offered by thehealth plan provider, they typicallysupply alternative education programsand offer them free of charge. Thisfinding indicates that the requirement inthe proposed rule for rewards-basedwellness programs to provide and payfor a reasonable alternative standard forindividuals for whom it is eitherunreasonably difficult or medicallyinadvisable to meet the original

standard will impose little new costs ortransfers to the affected plans.

Based on the foregoing, theDepartments herby certify that theseproposed regulations will not have asignificant economic impact on asubstantial number of small entities.

F. Paperwork Reduction ActDepartment of Labor and Department ofthe Treasury

The 2006 final regulations regardingwellness programs did not include aninformation collection request (ICR).These proposed regulations, like the

2006 final regulations, provide that if aplans wellness program requiresindividuals to meet a standard related toa health factor in order to qualify for areward and if the plan materialsdescribe this standard, the materialsmust also disclose the availability ofother means of qualifying for the rewardor the possibility of waiver of theotherwise applicable standard. If planmaterials merely mention that aprogram is available, the disclosurerelating to alternatives is not required.These proposed regulations include



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47 In 2012, that threshold level is approximately$139 million.

samples of disclosures that could beused to satisfy this requirement.

In concluding that these proposedregulations did not include an ICR, theDepartments reasoned that much of theinformation required was likely alreadyprovided as a result of state and localrequirements or the usual businesspractices of group health plans and

group health insurance issuers inconnection with the offer andpromotion of health care coverage. Inaddition, the sample disclosures wouldenable group health plans to make anynecessary modifications with minimaleffort.

Finally, although the proposedregulations do not include an ICR, theregulations could be interpreted torequire a revision to an existingcollection of information.Administrators of group health planscovered under Title I of ERISA aregenerally required to make certain

disclosures about the terms of a planand material changes in terms througha Summary Plan Description (SPD) orSummary of Material Modifications(SMM) pursuant to sections 101(a) and102(a) of ERISA and related regulations.The ICR related to the SPD and SMM iscurrently approved by OMB under OMBcontrol number 12100039, which iscurrently scheduled to expire on April30, 2013. While these materials may insome cases require revisions to complywith the proposed regulations, theassociated burden is expected to benegligible, and is already accounted for

in the SPD, SMM, and the ICR by aburden estimation methodology, whichanticipates ongoing revisions. Based onthe foregoing, the Departments do notexpect that any change to the existingICR arising from these prop

Incentives for Nondiscriminatory Wellness Programs in Group Health Plans

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