All's Well That Begins Well

September 1, 2006
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Companies come up with a lot of creative ways to control their health care costs. Recently, many of those efforts have focused on wellness and proactive health maintenance. As opposed to changing or limiting the care that sick patients receive, many employers are choosing to focus on keeping healthy workers healthy.

In many cases, that results in efforts to curb behaviors that can lead to serious, expensive health conditions in the future. Recently, companies have begun to offer financial incentives to help their wellness programs succeed. Those incentives can take a number of forms.

If a company wants to reduce the number of smokers it employs, it could charge them a higher rate for health insurance. If it has too many overweight workers, it could offer bonuses to those who are not overweight. If the employees are an unhealthy bunch in general, the company could set up a wellness plan that encourages healthy behavior and then require employees to participate.

A company could do all those things and more. But it might be breaking the law by doing any of them.

Between the restrictions provided by the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the Employee Retirement Income Security Act of 1974 (ERISA) and the Americans with Disabilities Act of 1990 (ADA), employers must tread carefully when designing employee benefit packages. Since wellness plans that incorporate financial incentives for participation are relatively new and growing in popularity, there is a growing need for legal expertise about them.

Sue Conway is a partner at the Grand Rapids law firm of Warner Norcross & Judd. Her practice specializes in employee benefits. Although wellness plans are nothing new, she said, the addition of financial incentives presents numerous potential legal pitfalls that could arise if a plan is not properly designed. And there’s not a lot of precedent to rely on.

“The law is developing, and I think the legal landscape is pretty vague right now. But that’s going to change. I would say probably two-thirds of our clients have some sort of wellness program,” she said. “It’s interesting that there hasn’t been a lot of legal development in that area yet.”

The biggest concern when mixing financial incentives and health care coverage is avoiding illegal discrimination. Conway said that employers must set up incentive programs so that they do not discriminate based upon a “health factor” as defined by HIPAA. But, to complicate matters, that’s only an issue if the incentive is “health plan related,” such as a decrease in premiums, co-pays or deductibles. So, for example, a company could provide a financial incentive for employees to participate in a wellness program, but not to meet specific goals in the program in exchange for better insurance rates.

“(With) a non-health-plan reward, then there really isn’t an issue — if it’s just (a cash incentive of) $100 or whatever. But if it’s a health plan reward, then you have to ask the question of whether it’s contingent on some kind of a health standard. If the answer is yes, then you have to meet the requirements for a ‘bona fide wellness program.’”

So if a company wanted to reward healthy behaviors and penalize unhealthy ones, it could do so as long as it either chose financial incentives or health-care incentives related to a bona fide wellness plan.

“If you meet the requirements for a bona fide wellness program, then you can discriminate based on health factors,” Conway said, proceeding to outline the proposed criteria for bona fide wellness plans. “(To meet the criteria) the reward must be limited. And they haven’t decided yet whether it’s going to be 10, 15 or 20 percent. The second one is that you have to allow people to re-qualify at least once a year. Third, if for some reason they can’t meet the standard due to a medical condition or what the regulators call ‘medically inadvisable’ to meet the standard, then you have to provide some kind of a reasonable alternative.”

The “reasonable alternative” is somewhat of a sticking point. Employers tend to see the health standards they base their incentives upon as being black-and-white, objective criteria. An employee either smokes or doesn’t. An employee either has an acceptable body mass score or doesn’t. What’s the reasonable alternative to losing weight or quitting smoking?

“I think that’s the most difficult thing for employers to understand and to deal with, particularly with the smoking,” Conway said. “They feel like, ‘If somebody is not going to quit smoking, why should I have to allow them this lower premium that nonsmokers get?’”

Because meeting the health standards established by the company might pose a risk to the employee’s health.

“If the doctor says, ‘Hey, you shouldn’t be doing this. This could put this person at risk for something else,’ then you have to come up with another alternative,” Conway said. That could mean, for example, smoking cessation classes or an appropriate exercise program in keeping with the physician’s recommendation.

Michigan’s laws complicate the issue further. Even if a preventive health management program falls under the Department of Labor’s definition of a bona fide wellness plan, it could violate state laws. For example, Michigan’s civil rights laws make it illegal for firms to discriminate in hiring decisions based on applicants’ weight, although that would be permissible in setting insurance premium levels under a bona fide wellness plan. At the same time, Michigan doesn’t have a law that makes it illegal for companies to base their hiring decisions on employees’ behavior outside of the workplace.

“You can say they can’t smoke at work, but you can’t say they can’t smoke at home,” Conway said. “Michigan doesn’t have a law like that.”

Apart from suggesting qualified legal guidance, Conway said that any company considering an incentivized wellness program should consider its individual needs before rushing into a plan.

“One of the things you need to do is look at your work force and see where your issues are,” she said. “You see what kind of program you need. Do we need some kind of smoking-cessation program? In our law firm very few people smoke, so it wouldn’t have much effect on us here, whereas something like a disease management program probably would.”

Updates on wellness plan regulations can be found at www.dol.gov/ebsa.

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