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U.S. DOL Looks at Supplemental Insurance Programs

Krugliak, Wilkins, Griffiths & Dougherty Co., L.P.A.

03.24.08 - Company-sponsored employee wellness programs have become quite popular among employees.  Such wellness programs have been cited as excellent opportunities for employers to encourage their employees to live healthy lifestyles, exercise regularly, and to quit bad habits, while also helping to reduce the collective expense of group health insurance.  However, companies with wellness programs need to be aware of recent changes made by the U.S. Department of Labor (DOL) that could potentially affect such programs.

On December 7, 2007, the DOL, along with the Departments of the Treasury and Health and Human Services, released Field Assistance Bulletin No.    2007-04 (FAB 2007-04) in response to the development of questionable wellness programs that were marketed as “supplemental” benefits.  Generally, the new guidelines affect employee wellness programs in which workers enroll in a company-sponsored health insurance plan with a high insurance deductible, which can then be reduced by earning credits for achieving various goals set for the employees related to their health and wellness.  For example, the goals might be targeted towards quitting smoking, lowering cholesterol or losing weight.  The credits are issued to the employees under a separate, supplemental insurance policy.

By way of background, the federal law known as the Health Insurance Portability and Accountability Act (HIPAA) mandates that all employees who are participants in the same company-sponsored plan must pay the same premiums regardless of their health.  Generally, under DOL regulations, employers may not discriminate against employees based upon “health factors” like prior illnesses, disabilities, poor medical histories, filing numerous claims, or unfavorable genetic information.

Generally speaking, an employer may offer employees health care discounts or financial incentives that are conditioned upon the employees’ participation (but not tied to their success) in the company-sponsored wellness program, and not run afoul of the HIPAA anti-discrimination rules.  Thus, wellness programs that provide a reduction in employee health care contributions to employees who, for example, attend wellness seminars or join a “quit smoking” program are generally permissible.  These wellness programs are permissible because they reward all employees who participate in the program, regardless of whether they have good results from their participation.

A second type of wellness program is more results-oriented, requiring employees to achieve certain benchmarks in order to earn discounts or financial incentives.  Programs of this type typically offer a reduced employee contribution to a company-sponsored health plan so long as the employee actually achieves certain wellness benchmarks, such as losing a specified amount of weight, lowering their cholesterol, or quitting smoking.  When a wellness program is designed to achieve certain results relating to “health factors,” then the wellness program must comply with the HIPAA anti-discrimination rules.  Importantly, in July of 2007, the DOL issued new regulations that created some exceptions to HIPAA that apply to results-oriented wellness programs.  Under these regulations, these types of wellness programs must satisfy five criteria to be permissible: 

1. the reward may not exceed 20% of the cost of coverage under the plan;
2. the program must be reasonably designed to promote health or prevent disease;
3. employees (or their dependents for such plans) must have an opportunity to qualify for the benefit at least once per year;
4. reasonable alternatives must be offered to those who could not otherwise qualify for the benefit, e.g., because a medical or genetic condition prevents an employee from achieving the target; and
5. the program materials must disclose all the terms, including the availability of reasonable alternatives.

Some wellness programs have attempted to sidestep these requirements through the use of supplemental insurance.  Supplemental insurance is generally exempt from HIPAA, which provided employers the potential to reward or penalize employees based on their health status through a supplemental insurance plan.  But according to the DOL’s December 7, 2007 release, not all coverage “being marketed as similar supplemental coverage actually qualifies as such.”  Thus, the December 7, 2007 DOL Release established four criteria that supplemental insurance policies can meet to be exempt from HIPAA:

1. The supplemental policy must be issued by an entity that does not provide the primary coverage under the plan. For this purpose, entities that are part of the same controlled group of corporations or part of the same group of trades or businesses under common control, are considered a single entity.
2. The supplemental policy must be specifically designed to fill gaps in primary coverage, such as co-insurance or deductibles, but does not include a policy, certificate, or contract of insurance that becomes secondary or supplemental only under a coordination-of-benefits provision.
3. The cost of coverage under the supplemental policy must not exceed 15% of the cost of primary coverage (with cost determined in the same manner as for COBRA premiums).
4. The supplemental policy must not differentiate among individuals in eligibility, benefits, or premiums based on any “health factor” of an individual (or any dependent of the individual).

As can be seen from this overview, the regulations and guidelines concerning company-sponsored wellness programs have been in a state of flux for the past several months.  All company-sponsored wellness programs must comply with these HIPAA regulations, and additionally must all comply with other federal or state laws affecting the programs.  Therefore, companies with wellness-programs are encouraged to investigate whether their programs are in compliance with these HIPAA nondiscrimination rules, as well as all other applicable federal and state laws.

If you have any questions, please contact Attorney Matthew P. Mullen or Attorney John P. Maxwell at Krugliak, Wilkins, Griffiths & Dougherty Co., L.P.A. at 330-497-0700.

NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.

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