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Daily Rules, Proposed Rules, and Notices of the Federal Government

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Employee Benefits Security Administration

45 CFR Parts 146 and 147

[CMS-9979-P]

RIN 0938-AR48

Incentives for Nondiscriminatory Wellness Programs in Group Health Plans

AGENCY: Internal Revenue Service, Department of the Treasury; Employee Benefits Security Administration, Department of Labor; Centers for Medicare & Medicaid Services, Department of Health and Human Services.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document proposes amendments to regulations, consistent with the Affordable Care Act, regarding nondiscriminatory wellness programs in group health coverage. Specifically, these proposed regulations would increase the maximum permissible reward under a health-contingent wellness program offered in connection with a group health plan (and any related health insurance coverage) from 20 percent to 30 percent of the cost of coverage. The proposed regulations would further increase the maximum permissible reward to 50 percent for wellness programs designed to prevent or reduce tobacco use. These regulations also include other proposed clarifications regarding the reasonable design of health-contingent wellness programs and the reasonable alternatives they must offer in order to avoid prohibited discrimination.
DATES: Comments are due on or before January 25, 2013.
ADDRESSES: Comments, identified by "Wellness Programs", may be submitted by one of the following methods:

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

Mail or Hand Delivery:Office of Health Plan Standards and Compliance Assistance, Employee Benefits Security Administration, Room N-5653, U.S. Department of Labor, 200 Constitution Avenue NW., Washington, DC 20210,Attention:Wellness Programs.

Comments received will be posted without change towww.regulations.govandwww.dol.gov/ebsa,and available for public inspection at the Public Disclosure Room, N-1513, Employee Benefits Security Administration, 200 Constitution Avenue NW., Washington, DC 20210, including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Amy Turner or Beth Baum, Employee Benefits Security Administration, Department of Labor, at (202) 693-8335; Karen Levin, Internal Revenue Service, Department of the Treasury, at (202) 622-6080; or Jacob Ackerman, Centers for Medicare & Medicaid Services, Department of Health and Human Services, at (410) 786-1565.

Customer Service Information:Individuals interested in obtaining information from the Department of Labor concerning employment-based health coverage laws may call the EBSA Toll-Free Hotline at 1-866-444-EBSA (3272) or visit the Department of Labor's Web site (www.dol.gov/ebsa). In addition, information from HHS on private health insurance for consumers can be found on the Centers for Medicare & Medicaid Services (CMS) Web site (www.cciio.cms.gov/) and information on health reform can be found atwww.HealthCare.gov.

SUPPLEMENTARY INFORMATION: I. Background A. Introduction

The Patient Protection and Affordable Care Act, Public Law 111-148, was enacted on March 23, 2010; the Health Care and Education Reconciliation Act, Public Law 111-152, was enacted on March 30, 2010 (these are collectively known as the “Affordable Care Act”). The Affordable Care Act reorganizes, amends, and adds to the provisions of part A of title XXVII of the Public Health Service Act (PHS Act) relating to group health plans and health insurance issuers in the group and individual markets. The term “group health plan” includes both insured and self-insured group health plans.1 The Affordable Care Act adds section 715(a)(1) to the Employee Retirement Income Security Act (ERISA) and section 9815(a)(1) to the Internal Revenue Code (the Code) to incorporate the provisions of part A of title XXVII of the PHS Act into ERISA and the Code, and to make them applicable to group health plans and health insurance issuers providing health insurance coverage in connection with group health plans. The PHS Act sections incorporated by these references are sections 2701 through 2728.

1The term “group health plan” is used in title XXVII of the PHS Act, part 7 of ERISA, and chapter 100 of the Code, and is distinct from the term “health plan,” as used in other provisions of title I of the Affordable Care Act. The term “health plan” does not include self-insured group health plans.

B. Wellness Exception to HIPAA Nondiscrimination Provisions

Prior to the enactment of the Affordable Care Act, Titles I and IV of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), Public Law 104-191, added section 9802 of the Code, section 702 of ERISA, and section 2702 of the PHS Act (HIPAA nondiscrimination and wellness provisions). These provisions generally prohibit group health plans and group health insurance issuers from discriminating against individual participants and beneficiaries in eligibility, benefits, or premiums based on a health factor.2 An exception to the general rule allows premium discounts or rebates or modification to otherwise applicable cost sharing (including copayments, deductibles or coinsurance) in return for adherence to certain programs of health promotion and disease prevention. The Departments of Labor, Health and Human Services (HHS), and theTreasury (collectively, the Departments) have implemented this exception by allowing benefits (including cost sharing), premiums, or contributions to vary based on participation in a wellness program if such a program adheres to certain conditions set forth in regulations.

2The HIPAA nondiscrimination provisions set forth eight health status-related factors, which the December 13, 2006 final regulations on nondiscrimination and wellness programs refer to as “health factors.” Under HIPAA and the 2006 regulations, the eight health factors are health status, medical condition (including both physical and mental illnesses), claims experience, receipt of health care, medical history, genetic information, evidence of insurability (including conditions arising out of acts of domestic violence), and disability.See66 FR 1379, January 8, 2001.

The Departments published joint final regulations on December 13, 2006 at 71 FR 75014 (the 2006 regulations) regarding the HIPAA nondiscrimination and wellness provisions.3 The 2006 regulations divide wellness programs into two general categories. The first category is programs that either do not require an individual to meet a standard related to a health factor in order to obtain a reward or that do not offer a reward at all (“participatory wellness programs”). Participatory wellness programs comply with the nondiscrimination requirements without having to satisfy any additional standards if participation in the program is made available to all similarly situated individuals.4 Examples of participatory wellness programs in the 2006 regulations include a fitness center reimbursement program,5 a diagnostic testing program that does not base any reward on test outcomes, a program that waives cost sharing for prenatal or well-baby visits,6 a program that reimburses employees for the costs of smoking cessation programs regardless of whether the employee quits smoking, and a program that provides rewards for attending a free health education seminar. There is no limit on the financial incentives for participatory wellness programs.

3 See26 CFR 54.9802-1; 29 CFR 2590.702; 45 CFR 146.121. Prior to issuance of the final 2006 regulations, the Departments published interim final regulations with request for comment implementing the HIPAA nondiscrimination provisions on April 8, 1997 at 62 FR 16894, followed by proposed regulations regarding wellness programs on January 8, 2001 at 66 FR 1421.

4 Seeparagraph (f)(1) of the 2006 regulations.See also26 CFR 54.9802-1(d), 29 CFR 2590.702(d), and 45 CFR 146.121(d), which provide that, generally, distinctions among groups of similarly situated participants in a health plan must be based on bona fide employment-based classifications consistent with the employer's usual business practice. A plan may also distinguish between beneficiaries based on, for example, their relationship to the plan participant (such as spouse or dependent child) or based on the age of dependent children. Distinctions are not permitted to be based on any of the health factors noted earlier.

5The Treasury and the IRS note that satisfying the rules for wellness programs does not determine the tax treatment of benefits provided by the wellness program. For example, fitness center fees are generally considered expenses for general good health and thus payment of the fee by the employer is not excluded from income as the reimbursement of a medical expense.

6Note that section 2713 of the PHS Act, as added by the Affordable Care Act, and the Departments' interim final regulations at 26 CFR 54.9815-2713T, 29 CFR 2590.715-2713, and 45 CFR 147.130 require non-grandfathered group health plans and health insurance issuers offering non-grandfathered group or individual health insurance coverage to provide benefits for certain preventive health services without the imposition of cost sharing.See also26 CFR 54.9815-1251T, 29 CFR 2590.715-1251, and 45 CFR 147.140 (regarding the definition of grandfathered health plan coverage).

The second category of wellness programs under the 2006 regulations consists of programs that require individuals to satisfy a standard related to a health factor in order to obtain a reward (“health-contingent wellness programs”). This category includes wellness programs that require an individual to attain or maintain a certain health outcome in order to obtain a reward (such as not smoking, attaining certain results on biometric screenings, or meeting targets for exercise). As outlined in the 2006 regulations,7 plans and issuers may vary benefits (including cost-sharing mechanisms), premiums, or contributions based on whether an individual has met the standards of a wellness program that meets the requirements of paragraph (f). Paragraph (f)(2) of the 2006 regulations prescribes the following consumer-protection conditions for health-contingent wellness programs:

7 See26 CFR 54.9802-1(b)(2)(ii) and (c)(3); 29 CFR 2590.702(b)(2)(ii) and (c)(3); and 45 CFR 146.121(b)(2)(ii) and (c)(3).

1. The total reward for such wellness programs offered by a plan sponsor does not exceed 20 percent of the total cost of coverage under the plan.

2. The program is reasonably designed to promote health or prevent disease. For this purpose, it must have a reasonable chance of improving health or preventing disease, not be overly burdensome, not be a subterfuge for discriminating based on a health factor, and not be highly suspect in method.

3. The program gives eligible individuals an opportunity to qualify for the reward at least once per year.

4. The reward is available to all similarly situated individuals. For this purpose, a reasonable alternative standard (or waiver of the otherwise applicable standard) must be made available to any individual for whom it is unreasonably difficult due to a medical condition to satisfy the otherwise applicable standard during that period (or for whom it is medically inadvisable to attempt to satisfy the otherwise applicable standard).

5. In all plan materials describing the terms of the program, the availability of a reasonable alternative standard (or the possibility of waiver of the otherwise applicable standard) is disclosed.

C. Amendments Made by the Affordable Care Act

The Affordable Care Act (section 1201) amended the nondiscrimination and wellness program provisions of the PHS Act (but not of ERISA section 702 or Code section 9802). (Affordable Care Act section 1201 also moved those provisions from PHS Act section 2702 to PHS Act section 2705). As amended by the Affordable Care Act, the nondiscrimination and wellness provisions of PHS Act section 2705 largely reflect the 2006 regulations (except as discussed later in this preamble), and extend the nondiscrimination protections to the individual market.8 The wellness program exception to the prohibition on discrimination under PHS Act section 2705 applies with respect to group health plans (and any health insurance coverage offered in connection with such plans). Section 2705(l) separately provides for a 10-State wellness program demonstration project in the individual market, to be established not later than July 1, 2014 (as such, this proposed rule does not include wellness program policy for the individual market).

8Section 1201 of the Affordable Care Act also moved the guaranteed availability provisions that were previously codified in PHS Act section 2711 to PHS Act section 2702, and extended those requirements to the individual market.

D. Application to Grandfathered Plans

Section 1251 of the Affordable Care Act provides that certain amendments made by the Affordable Care Act generally do not apply to plans or health insurance coverage that are in effect on the date of enactment (and that are not changed in ways specified in implementing regulations),9 except as specified in section 1251(a)(3) and (4) of the Affordable Care Act. Specifically, section 1251(a)(2) of the Affordable Care Act provides that subtitles A and C of title I of the Affordable Care Act, and the amendments made by such subtitles, “shall not apply” to such grandfathered health plans.

9 See26 CFR 54.9815-1251T, 29 CFR 2590.715-1251, and 45 CFR 147.140 (75 FR 34538, June 17, 2010), as amended (75 FR 70114, November 17, 2010).See alsoQ5 of Affordable Care Act Implementation FAQs Part II (October 8, 2010), available at http;//www.dol.gov/ebsa/faqs/faq-aca2.html andhttp://cciio.cms.gov/resources/factsheets/aca_implementation_faqs2.html.

Because the amendments made to the PHS Act in section 1201 of the Affordable Care Act do not apply to grandfathered health plans, the version of PHS Act section 2702 in effect at the time of enactment of the Affordable Care Act (and the 2006 regulations under that section) continues to apply tograndfathered health plans, while the provisions of the new PHS Act section 2705 apply to non-grandfathered health plans for plan years (in the individual market, policy years) beginning on or after January 1, 2014.10 ERISA section 702 and Code section 9802 continue to govern all group health plans, including grandfathered health plans, and, for plan years beginning on or after January 1, 2014, ERISA section 715(a)(1) and Code section 9815(a)(1) will also apply new PHS Act section 2705 to non-grandfathered health plans.

10 See26 CFR 54.9815-1251T(c)(2), 29 CFR 2590.715-1251(c)(2), and 45 CFR 147.140(c)(2), providing that a grandfathered health plan must comply with the requirements of the PHS Act, ERISA, and the Code applicable prior to the changes enacted by the Affordable Care Act, to the extent not inconsistent with the rules applicable to a grandfathered health plan (75 FR 34538, June 17, 2010).

However, because the Departments believe that the provisions of these proposed regulations would be authorized under either HIPAA or the Affordable Care Act, the Departments are proposing in this rulemaking to apply the same set of standards to both grandfathered and non-grandfathered health plans. As noted, PHS Act section 2705(j) largely adopts the wellness program provisions of the 2006 regulations with some modification and clarification. Consistent with the statutory approach, these proposed regulations would apply the rules of PHS Act section 2705, governing rewards for adherence to certain wellness programs, to grandfathered health plans by regulation under authority in the HIPAA nondiscrimination and wellness provisions as was done in the 2006 regulations. This approach is intended to avoid inconsistency across group health coverage and to provide grandfathered plans the same flexibility to promote health and prevent disease as non-grandfathered plans.

II. Overview of the Proposed Rule

These regulations generally propose standards for group health plans and health insurance issuers offering group health insurance coverage with respect to wellness programs. These proposed regulations would replace the wellness program provisions of paragraph (f) of the 2006 regulations and would apply to both grandfathered and non-grandfathered group health plans and group health insurance coverage for plan years beginning on or after January 1, 2014. These regulations also propose to implement the nondiscrimination provisions made applicable to the individual market by section 1201 of the Affordable Care Act. This rulemaking does not propose to modify provisions of the 2006 regulations other than paragraph (f).

A. Two Categories of Wellness Programs

Consistent with the 2006 regulations and PHS Act section 2705(j), these proposed regulations would continue to divide wellness programs into two categories: “Participatory wellness programs”, which are a majority of wellness programs (as noted below) and “health-contingent wellness programs.” Participatory wellness programs are programs that are made available to all similarly situated individuals and that either do not provide a reward or do not include any conditions for obtaining a reward that are based on an individual satisfying a standard that is related to a health factor. Several examples of participatory wellness programs are provided in these proposed regulations, including: (1) A program that reimburses for all or part of the cost of membership in a fitness center; and (2) a program that provides a reward to employees for attending a monthly, no-cost health education seminar. Participatory programs are not required to meet the five requirements applicable to health-contingent wellness programs.

In contrast, health-contingent wellness programs require an individual to satisfy a standard related to a health factor to obtain a reward (or require an individual to do more than a similarly situated individual based on a health factor in order to obtain the same reward). Like the 2006 regulations, these proposed regulations would continue to permit rewards to be in the form of a discount or rebate of a premium or contribution, a waiver of all or part of a cost-sharing mechanism (such as deductibles, copayments, or coinsurance), the absence of a surcharge, the value of a benefit that otherwise would not be provided under the plan, or other financial or nonfinancial incentives or disincentives. Examples of health-contingent wellness programs in these proposed regulations are: (1) A program that imposes a premium surcharge based on tobacco use; and (2) a program that uses a biometric screening or a health risk assessment to identify employees with specified medical conditions or risk factors (such as high cholesterol, high blood pressure, abnormal body mass index, or high glucose level) and provides a reward to employees identified as within a normal or healthy range (or at low risk for certain medical conditions), while requiring employees who are identified as outside the normal or healthy range (or at risk) to take additional steps (such as meeting with a health coach, taking a health or fitness course, adhering to a health improvement action plan, or complying with a health care provider's plan of care) to obtain the same reward. Under paragraphs (b)(2)(ii) and (c)(3) of the 2006 regulations (which remain unchanged),11 health-contingent wellness programs are permissible only if they comply with the provisions of paragraph (f)(3), which are proposed to be amended in this rulemaking.12

1126 CFR 54.9802-1(b)(2)(ii) and (c)(3); 29 CFR 2590.702(b)(2)(ii) and (c)(3); and 45 CFR 146.121(b)(2)(ii) and (c)(3).

12Until these proposed regulations are finalized and effective, the provisions of the 2006 regulations, at 26 CFR 54.9802-1(f), 29 CFR 2590.702(f), and 45 CFR 146.121(f) generally remain applicable to group health plans and group health insurance issuers.

The Departments believe that appropriately designed wellness programs have the potential to contribute importantly to promoting health and preventing disease. Even after the issuance of the 2006 regulations and the enactment of the Affordable Care Act wellness provisions, however, stakeholder feedback suggests that there continues to be a degree of confusion regarding the scope of the rules governing wellness programs. The Departments hope that these proposed regulations will help dispel the confusion by reiterating that the five regulatory requirements relating to frequency of opportunity to qualify, size of reward, uniform availability and reasonable alternative standards, reasonable design, and notice of other means of qualifying for the reward (summarized below and contained in paragraph (f)(3) of the proposed regulations) apply only to those wellness programs that meet the definition of “health-contingent” programs. As discussed above, these are wellness programs that both provide a reward and condition the reward on satisfying a standard that is related to a health factor. Many wellness programs (those characterized in these regulations as “participatory wellness programs”) do not both provide a reward and condition the reward on satisfying a standard that is related to a health factor. Accordingly, as noted, participatory wellness programs are not required to meet the five enumerated requirements applicable to health-contingent wellness programs, but they are required to be made available to all similarly situated individuals.

B. Requirements for Health-Contingent Wellness Programs

Consistent with the 2006 regulations, these proposed regulations generally would maintain the five requirements for health-contingent wellness programs with one significant modification relating to the size of the reward. In addition, several regulatory provisions have been re-ordered, and clarifications are proposed to address questions and issues raised by stakeholders since the 2006 regulations were issued and to be consistent with the amendments made by the Affordable Care Act, as discussed below.

(1)Frequency of Opportunity to Qualify.

These proposed regulations would, consistent with the 2006 regulations and the amendments made by the Affordable Care Act, require health-contingent wellness programs to give individuals eligible for the program the opportunity to qualify for the reward at least once per year. As stated in the preamble to the 2006 regulations, the once-per-year requirement was included as a bright-line standard for determining the minimum frequency that is consistent with a reasonable design for promoting good health or preventing disease.13

13 See71 FR at 75018.

(2)Size of Reward.

Like the 2006 regulations, these proposed regulations would continue to limit the total amount of the reward for health-contingent wellness programs with respect to a plan, whether offered alone or coupled with the reward for other health-contingent wellness programs. Specifically, the total reward offered to an individual under an employer's health-contingent wellness programs could not exceed a specified percentage (referred to as the “applicable percentage” in the proposed regulations) of the total cost of employee-only coverage under the plan, taking into account both employer and employee contributions towards the cost of coverage. If, in addition to employees, any class of dependents (such as spouses, or spouses and dependent children) may participate in the health-contingent wellness program, the reward could not exceed the applicable percentage of the total cost of the coverage in which the employee and any dependents are enrolled (such as family coverage or employee-plus-one coverage).

Some stakeholders have raised questions about health-contingent wellness programs that allow dependents to participate, and what portion of the reward should be attributable to each participating dependent. If a class of dependents may participate in a health-contingent wellness program, some have suggested that there be a maximum reward attributable to the employee's participation in the wellness program, such as an amount that does not exceed the applicable percentage of the cost of employee-only coverage. The proposed regulation being issued contemporaneously by HHS proposes that, to comply with PHS Act section 2701, with respect to family coverage, any premium variation for tobacco use must be applied to the portion of premium attributable to each family member. The Departments invite comments on apportionment of rewards in health-contingent wellness programs (which may involve tobacco use and/or other health factors)—for example, should the reward be prorated if only one family member fails to qualify for it.

The 2006 regulations specify 20 percent as the maximum permissible reward for participation in a health-contingent wellness program. PHS Act section 2705(j)(3)(A), effective for plan years beginning on or after January 1, 2014, increases the maximum reward to 30 percent and authorizes the Departments to increase the maximum reward to as much as 50 percent if the Departments determine that such an increase is appropriate. In these proposed regulations, the increase in the applicable percentage from 20 percent to 30 percent, which is effective for plan years beginning on or after January 1, 2014, conforms to the new PHS Act section 2705(j)(3)(A). In addition, the Departments have determined that an increase of an additional 20 percentage points (to 50 percent) for health-contingent wellness programs designed to prevent or reduce tobacco use is warranted to conform to the new PHS Act section 2701, to avoid inconsistency across group health coverage, whether insured or self-insured, or offered in the small group or large group market, and to provide grandfathered plans the same flexibility to promote health and prevent disease as non-grandfathered plans.

Specifically, PHS Act section 2701, the “fair health insurance premium” provision, sets forth the factors that issuers may use to vary premium rates in the individual or small group market.14 PHS Act section 2701(a)(1)(A)(iv) provides that issuers in the individual and small group markets cannot vary rates for tobacco use by more than a ratio of 1.5 to 1 (that is, allowing up to a 50 percent premium surcharge for tobacco use). Contemporaneously with the publication of these proposed wellness program regulations, HHS is publishing a proposed regulation that would implement PHS Act section 2701. HHS proposes that a health insurance issuer in the small group market would be able to implement the tobacco use surcharge under PHS Act section 2701 to employees only in connection with a wellness program meeting the standards of PHS Act section 2705(j) and its implementing regulations. As discussed in the preamble to the proposed regulation implementing PHS Act section 2701, HHS is proposing in that rule that the definition of “tobacco use” for purposes of section 2701 be consistent with the approach taken with respect to health-contingent wellness programs designed to prevent or reduce tobacco use under section 2705(j). Comments are solicited in the preamble to the proposed rules implementing section 2701 on possible definitions of “tobacco use” that would be applied for purposes of PHS Act sections 2701 and 2705(j).

14Small group market means the health insurance market under which individuals obtain health insurance coverage (directly or through any arrangement) on behalf of themselves (and their dependents) through a group health plan maintained by a small employer.SeePHS Act section 2791(e)(5); 45 CFR 144.103. For plan years beginning on or after January 1, 2014, amendments made by the Affordable Care Act provide that the term “small employer” means, in connection with a group health plan with respect to a calendar year and a plan year, an employer who employed an average of at least 1 but not more than 100 employees on business days during the preceding calendar year and who employs at least 1 employee on the first day of the plan year.SeePHS Act section 2791(e)(4). In the case of plan years beginning before January 1, 2016, a State may elect to substitute “50 employees” for “100 employees” in its definition of a small employer.Seesection 1304(b)(3) of the Affordable Care Act.

To coordinate these proposed regulations with the tobacco use rating provisions of PHS Act section 2701, as proposed by HHS, these proposed wellness program regulations would use the new authority in PHS Act section 2705(j)(3)(A) (and, with respect to grandfathered health plans, the preexisting authority in the HIPAA nondiscrimination and wellness provisions) to increase the applicable percentage for determining the size of the reward for participating in a health-contingent wellness program by an additional 20 percentage points (to 50 percent) to the extent that the additional percentage is attributed to tobacco use prevention or reduction. Applying these proposed regulations to all group health plans would provide consistency across markets, giving large, self-insured, and grandfathered employment-based healthplans the same added flexibility to promote tobacco-free workforces as small, insured, non-grandfathered health plans.

Examples included in these proposed regulations illustrate how to calculate the applicable percentage. The Departments invite comments on the proposed approach in general and other ideas for coordinating the implementation of the tobacco rating factor under PHS Act section 2701 with the nondiscrimination and wellness program provisions. The Departments also invite comments as to whether additional rules or examples would be helpful to demonstrate compliance with the limitation on the size of the reward when the amount of the reward is variable and is not determinable at the time the reward is established (for example, when the reward is waiver of a copayment for outpatient office visits, the frequency of which will not be predictable for any particular participant or beneficiary under the plan).

(3)Uniform Availability and Reasonable Alternative Standards.

A critical element of these proposed regulations is the requirement that the reward under a health-contingent wellness program be available to all similarly situated individuals. To meet this requirement, a “reasonable alternative standard” (or waiver of the otherwise applicable standard) for obtaining the reward must be provided for any individual for whom, for that period, it is either unreasonably difficult due to a medical condition to meet the otherwise applicable standard, or for whom it is medically inadvisable to attempt to satisfy the otherwise applicable standard. That is, the same, full reward must be available to individuals who qualify by satisfying a reasonable alternative standard as is provided to individuals who qualify by satisfying the program's otherwise applicable standard. These proposed regulations would generally reiterate the requirements set forth in the 2006 regulations and codified in PHS Act section 2705(j), and provide several additional clarifications.

First, under these proposed regulations, as under the 2006 regulations, in lieu of providing a reasonable alternative standard, a plan or issuer may always waive the otherwise applicable standard and provide the reward. The plan or issuer may waive the otherwise applicable standard and provide a reward for an entire class of individuals or may do so on an individual-by-individual basis based on the facts and circumstances presented.

Second, these proposed regulations would not require plans and issuers to establish a particular alternative standard in advance of an individual's specific request for one. However, a reasonable alternative standard would have to be provided by the plan or issuer (or the condition for obtaining the reward would be required to be waived) upon an individual's request. In this connection, the Departments note that, as stated in the preamble to the 2006 regulations with respect to tobacco cessation, “overcoming an addiction sometimes requires a cycle of failure and renewed effort.”15 Plans and issuers cannot cease to provide a reasonable alternative standard merely because one was not successful before; they must continue to offer a reasonable alternative standard, whether it is the same standard or a new reasonable alternative standard (such as a new weight-loss class or a new nicotine replacement therapy).16

15 See71 FR 75019.

16 Id.

All the facts and circumstances would be taken into account in determining whether a plan or issuer has provided a reasonable alternative standard, including but not limited to the following proposed factors:

• If the reasonable alternative standard is completion of an educational program, the plan or issuer must make the educational program available instead of requiring an individual to find such a program unassisted, and may not require an individual to pay for the cost of the program.

• If the reasonable alternative standard is a diet program, the plan or issuer is not required to pay for the cost of food but must pay any membership or participation fee.

• If the reasonable alternative standard is compliance with the recommendations of a medical professional who is an employee or agent of the plan or issuer, and an individual's personal physician states that the medical professional's recommendations are not medically appropriate for that individual, the plan or issuer must provide a reasonable alternative standard that accommodates the recommendations of the individual's physician with regard to medical appropriateness.17 Plans and issuers may impose standard cost sharing under the plan or coverage for medical items and services furnished in accordance with the physician's recommendations.

17As stated in the preamble to the Departments' regulations on internal claims and appeals and external review processes, adverse benefit determinations based on whether a participant or beneficiary is entitled to a reasonable alternative standard for a reward under a plan's wellness program are situations in which a claim is considered to involve medical judgment and therefore is eligible for Federal external review.See76 FR 37216.

The Departments intend that these clarifications with respect to offering reasonable alternative standards will help prevent health-contingent wellness programs that provide little to no support to enrollees to improve individuals' health. In addition, as explained later in this preamble, clarifications are proposed to ensure that a health-contingent wellness program is reasonably designed to improve health and is not a subterfuge for underwriting or reducing benefits based on health status. Comments are invited on these provisions, as well as whether other facts and circumstances should be specifically addressed. For example, the Departments seek comment on whether any additional rules or clarifications are needed with respect to the process for determining a reasonable alternative standard.

Finally, the 2006 regulations provided that it is permissible for a plan or issuer to seek verification, such as a statement from the individual's personal physician, that a health factor makes it unreasonably difficult for the individual to satisfy, or medically inadvisable for the individual to attempt to satisfy, the otherwise applicable standard. The Affordable Care Act amendments codified this provision with one modification: PHS Act section 2705(j)(3)(D)(ii) makes clear that physician verification may be required by a plan or issuer “if reasonable under the circumstances.” These proposed regulations clarify that it would not be reasonable for a plan or issuer to seek verification of a claim that is obviously valid based on the nature of the individual's medical condition that is known to the plan or issuer. Plans and issuers are permitted under the proposed regulations to seek verification of claims that require the use of medical judgment to evaluate. The Departments solicit comments on whether additional clarifications would be helpful regarding the reasonableness of physician verification.

(4)Reasonable Design.

Consistent with the 2006 regulations and PHS Act section 2705(j), these proposed regulations would continue to require that health-contingent wellness programs be reasonably designed to promote health or prevent disease, not be overly burdensome, not be a subterfuge for discrimination based on a health factor, and not be highly suspectin the method chosen to promote health or prevent disease. The preamble to the 2006 regulations stated that the “reasonably designed” standard was designed to prevent abuse, but otherwise was “intended to be an easy standard to satisfy * * *. There does not need to be a scientific record that the method promotes wellness to satisfy this standard. The standard is intended to allow experimentation in diverse ways of promoting wellness.”18 The preamble also stated that the Departments did not “want plans and issuers to be constrained by a narrow range of programs * * * but want plans and issuers to feel free to consider innovative programs for motivating individuals to make efforts to improve their health.”19 These proposed regulations would continue to provide plans and issuers flexibility and encourage innovation. Also, as discussed later in this preamble, the regulations include several clarifications to ensure against subterfuge and discrimination. Comments are welcome on whether certain standards, including evidence- or practice-based standards, are needed to ensure that wellness programs are reasonably designed to promote health or prevent disease. The Departments also welcome comments on best practices guidance regarding evidence- and practice-based strategies in order to increase the likelihood of wellness program success. Resources for employers and plans include the Healthier Worksite Initiative of the Centers for Disease Control and Prevention (CDC) athttp://www.cdc.gov/nccdphp/dnpao/hwi/.

1871 FR 75018.

1971 FR 75019.

Under the proposed regulations, the determination of whether a health-contingent wellness program is reasonably designed is based on all the relevant facts and circumstances. To ensure that programs are not a subterfuge for discrimination or underwriting based on health factors such as weight, blood pressure, glucose levels, cholesterol levels, or tobacco use with no or insufficient support to improve individuals' health, the Departments propose that, to the extent a plan's initial standard for obtaining a reward (or a portion of a reward) is based on results of a measurement, test, or screening that is related to a health factor (such as a biometric examination or a health risk assessment), the plan is not reasonably designed unless it makes available to all individuals who do not meet the standard based on the measurement, test, or screening a different, reasonable means of qualifying for the reward. Accordingly, the general approach that was adopted in the 2006 regulations is preserved, which allows plans and issuers to conduct screenings and employ measurement techniques in order to target wellness programs effectively. For example, plans and issuers could target individuals with high cholesterol for participation in cholesterol reduction programs, or individuals who use tobacco for participation in tobacco cessation programs, rather than the entire population of participants and beneficiaries if individuals who do not meet a plan's target biometrics (or similar standards) are provided a different, reasonable means of qualifying for the same reward. The Departments invite comments on this approach, including on ways to ensure that employees will not be subjected to an unreasonable “one-size-fits-all” approach to designing the different means of qualifying for the reward that would fail to take an employee's circumstances into account to the extent that, as a practical matter, they would make it unreasonably difficult for the employee to access those different means of qualifying. Comments also are invited on whether any other consumer protections are needed to ensure that wellness programs are reasonably designed to promote health or prevent disease.

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

These proposed regulations, consistent with the 2006 regulations and the amendments made by the Affordable Care Act, would require plans and issuers to disclose the availability of other means of qualifying for the reward or the possibility of waiver of the otherwise applicable standard in all plan materials describing the terms of a health-contingent wellness program. If plan materials merely mention that a program is available, without describing its terms, this disclosure is not required. For example, a summary of benefits and coverage (SBC) required under section 2715 of the PHS Act that notes that cost sharing may vary based on participation in a diabetes wellness program, without describing the standards of the program, would not trigger this disclosure.

The 2006 regulations provided sample language that could be used to satisfy this requirement in both the regulatory text and in several examples. However, feedback and experience since the 2006 regulations were published have indicated that the sample language was complicated and confusing to some individuals and may have led fewer individuals to seek a reasonable alternative standard than were eligible. Accordingly, these proposed regulations provide new sample language in the regulatory text and in examples that is intended to be simpler for individuals to understand and to increase the likelihood that those who qualify for a different means of obtaining a reward will contact the plan or issuer to request it. The Departments invite comment on the sample language in both the regulatory text and in the examples.

C. Application to the Individual Health Insurance Market

PHS Act sections 2705(a) and (b), as added by section 1201 of the Affordable Care Act, apply the HIPAA nondiscrimination requirements to health insurance issuers in the individual health insurance market. Accordingly, the HHS proposed regulations include a new § 147.110 which applies the nondiscrimination protections of the 2006 regulations to non-grandfathered, individual health insurance coverage, effective for policy years beginning on or after January 1, 2014. By their terms, the wellness program provisions of PHS Act section 2705(j), however, do not apply to health insurance coverage in the individual market. Accordingly, the wellness program provisions of § 146.121(f) apply only to group health plans and group health insurance coverage, not individual market coverage.

D. Applicability Date

These proposed regulations would apply for plan years (in the individual market, policy years) beginning on or after January 1, 2014, consistent with the statutory effective date of PHS Act section 2705, as well as PHS Act section 2701. Comments are invited on this proposed applicability date.

III. Economic Impact and Paperwork Burden A. Executive Orders 12866 and 13563—Department of Labor and Department of Health and Human Services

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects; distributive impacts; and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. The Office of Management and Budget (OMB) has determined that this proposed rule is a“significant regulatory action” under section 3(f)(4) of Executive Order 12866, because it raises novel legal or policy issues arising from the President's priorities. Accordingly, the rule has been reviewed by the OMB.

Table 1—Accounting 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. Improved standards could reduce the use of wellness programs as a subterfuge for discrimination based on a health factor. Costs Quantified: Minimal since employers are expected to create or expand wellness programs only if the expected benefit 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 alternative means of complying with the health standard. To the extent an individual faces an increased cost for not meeting 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 of the most recent literature and studies regarding wellness programs, the Departments reached the conclusion that the impact of the benefits, costs, and transfers associated with the proposed rules will be minimal. As discussed in this analysis, few health-contingent wellness programs today come close to meeting the 20 percent limit (based on the data, the usual reward percentage ranges from three to 11 percent); therefore, the Departments do not believe that expanding the limit to 30 percent (or 50 percent for programs designed to prevent or reduce tobacco use) will result in significantly higher participation of employers in such programs. The Departments provide a qualitative discussion below and cite the survey data used to substantiate this conclusion. Moreover, most wellness programs appear to be participatory programs that do not require an individual to meet a standard related to a health factor in order to obtain a reward. As stated earlier in this preamble, these participatory wellness programs are not required to meet the five requirements that apply to health-contingent wellness programs, but they are required to be made available to all similarly situated individuals.

Although the Departments believe few plans will expand the reward percentage, the Departments provide a qualitative discussion regarding the sources of benefits, costs, and transfers that could occur if plans were to expand the reward beyond the current maximum of 20 percent. Currently, insufficient broad-based evidence makes it difficult to definitively assess the impact of workplace wellness programs on health outcomes and cost, although, overall, employers largely report that workplace wellness programs in general (participatory programs and health-contingent programs) are delivering on their intended benefit of improving health and reducing costs.

The one source of potential additional cost discussed in the impact analysis is the clarification that plans must provide a reasonable alternative means of satisfying the otherwise applicable standard. The Departments present evidence that currently employers not only allow a reasonable alternative standard, but that most employers already pay for these alternatives. The Departments do not have an estimate of how many plans are not currently paying for alternatives consistent with the clarifications set forth in the proposed regulations, but the number appears to be small. The Departments also employ economic logic to conclude that employers will create or expand their wellness program and provide reasonable alternatives only if the expected benefits exceed the expected costs. Therefore, the Departments believe that the benefits of the proposed rule will justify the costs. The Departments invite comments on these conclusions and request input for improving the analysis, including additional data, surveys, or studies.

B. Background and Need for Regulatory Action—Department of Labor and Department of Health and Human Services

As discussed earlier in this preamble, on December 13, 2006, the Departments issued joint final regulations regarding the HIPAA nondiscrimination and wellness provisions. The 2006 regulations set forth the requirements for wellness programs that provide a reward to individuals who satisfy a standard related to a health factor or provide a reward to individuals to do more than a similarly situated individual based on a health factor.Seesection I.B. of this preamble for a detailed discussion of the HIPAA nondiscrimination and wellness provisions and the 2006 regulations.

PHS Act section 2705 largely reflects the provisions of the 2006 regulations with some modification and clarification. Most notably, it increased the maximum reward that can be provided under a health-contingent wellness program from 20 percent to 30 percent of the total cost of coverage under the plan and authorized the Departments to increase this percentage to as much as 50 percent of the total cost of coverage under the plan, if the Departments determine that such an increase is appropriate. Accordingly, as discussed in section II.B of this preamble, these proposed regulations increase the applicable percentage for the maximum reward from 20 percent to 30 percent, with an additional increase of 20 percentage points (to 50 percent) for health-contingent wellness programs designed to prevent or reduce tobacco use. The additional increase is warranted to conform to PHS Act section 2701, to avoid inconsistency across group health coverage, whether insured or self-insured, or offered in the small group or large group market, and to provide grandfathered plans the same flexibility to promote health and prevent disease as non-grandfathered plans.20

20For a discussion of PHS Act section 2701 and the HHS proposed regulation being published contemporaneously with these proposed regulations, see section II.B.2. of this preamble.

C. Regulatory Alternatives—Department of Labor and Department of Health and Human Services

As stated earlier in this preamble, the 2006 regulations prescribed several requirements for health-contingent wellness programs, including a limitation on the maximum reward of 20 percent of the total cost of coverageunder the plan.21 PHS Act section 2705 largely reflects the requirements for wellness programs from the 2006 regulations with some modification and clarification. Most notably, it increased the maximum reward that can be provided under a health-contingent wellness program from 20 percent to 30 percent of the total cost of coverage under the plan and authorized the Departments to increase this percentage to as much as 50 percent, if the Departments determine that such an increase is appropriate.

21 Seesection I.B, earlier in this preamble.

PHS Act section 2701(a)(1)(A)(iv) provides that issuers in the individual and small group markets cannot vary rates for tobacco use by more than a ratio of 1.5 to 1 (that is, allowing up to a 50 percent rating factor for tobacco use) for non-grandfathered plans. PHS Act section 2701 applies to the individual market and the small group market, but does not apply in the large group market or to self-insured plans. Contemporaneously with the publication of these proposed regulations, HHS is publishing a proposed rule that would provide that an issuer in the small group market would not be able to impose the tobacco rating factor on an individual in the plan under PHS Act section 2701 unless it was imposed as part of a wellness program meeting the standards of PHS Act section 2705(j) and its implementing regulations.

An important policy goal of the Departments is to provide the large group market and self-insured plans and grandfathered health plans with the same flexibility as non-grandfathered plans in the small group market to promote tobacco-free workforces. The Departments considered several regulatory alternatives to meet this objective, including the following:

(1)Stacking premium differentials.One alternative considered was to permit a 50 percent premium differential for tobacco use in the small group market under PHS Act section 2701 without requiring a reasonable alternative standard. Under PHS Act section 2705, an additional 30 percent premium differential would also be permitted if the five criteria for a health-contingent wellness program are met (including the offering of a reasonable alternative standard). Under this option, an 80 percent premium differential would have been allowable in the small group market based on factors related to health status. Large and self-insured plans would have been limited to the 30 percent maximum reward. Allowing such a substantial difference between what was permissible in the small group market and the large group market was not in line with the Departments' policy goal of providing consistency in flexibility for plans.

(2)Concurrent premium differentials with no reasonable alternative required to be offered for tobacco use.Another alternative would be to read sections 2701 and 2705 together such that, for non-grandfathered health plans in the small group market, up to a 50 percent premium differential would be permitted based on tobacco use, as authorized under PHS Act section 2701(a)(1)(A)(iv), with no reasonable alternative standard required for the tobacco use program. With respect to non-tobacco-related wellness programs, a reward could be offered only to the extent that a tobacco use wellness program were less than 30 percent of the cost of coverage because the two provisions apply concurrently, and a reward would not be permitted under PHS Act section 2705 if the maximum reward already were exceeded by virtue of PHS Act section 2701. Thus, the 50 percent tobacco surcharge under PHS Act section 2701 would be available only to non-grandfathered, insured, small group plans. The chosen approach is intended to avoid inconsistency and to provide grandfathered plans the same flexibility to promote health and prevent disease as non-grandfathered plans.

D. Current Use of Wellness Programs and Economic Impacts—Department of Labor and Department of Health and Human Services

The current use of wellness programs and economic impacts of these proposed regulations are discussed in this analysis.

Wellness programs22 have become common among employers in the United States. The 2012 Kaiser/HRET survey indicates that 63 percent of all employers who offered health benefits also offered at least one wellness program.23 The uptake of wellness programs continues to be more common among large employers. For example, the 2012 Kaiser/HRET survey found that health risk assessments are offered by 38 percent of large employers offering health benefits, but only 18 percent of employers with fewer than 200 workers.

22On behalf of the Departments, RAND researchers did a review of the current literature on this topic. “A Review of the U.S. Workplace Wellness Market” February 2012. The report can be found athttp://www.dol.gov/ebsa/pdf/workplacewellnessmarketreview2012.pdf.

23Kaiser Family Foundation,Employer Health Benefits: 2011 Annual Survey.2011, The Kaiser Family Foundation, Menlo Park, CA; Health Research & Educational Trust, Chicago, IL.

The Kaiser/HRET survey indicates that 29 percent of all firms and 53 percent of large firms offered weight loss programs, while 30 percent and 64 percent, respectively, offered gym memberships or on-site exercise facilities. Meanwhile, 32 percent of all employers and 63 percent of large employers offered smoking cessation resources. Despite widespread availability, actual participation of employees in wellness programs remains limited. While no nationally representative data exist, a 2010 non-representative survey suggests that typically less than 20 percent of eligible employees participate in wellness interventions such as smoking cessation.24

24Nyce, S.Boosting Wellness Participation Without Breaking the Bank.TowersWatson Insider. July, 2010:1-9.

Currently, insufficient broad-based evidence makes it difficult to definitively assess the impact of workplace wellness on health outcomes and cost. Yet, overall, employers largely report that workplace wellness programs are delivering on their intended benefit of improving health and reducing costs. According to the 2011 Kaiser/HRET survey, 65 percent of respondents that offered wellness programs stated that these programs improved employee health, and 53 percent believed that they reduced costs. Larger firms (defined as those with more than 200 workers in the Kaiser/HRET survey) were significantly more positive, as 74 percent affirmed that workplace wellness programs improved health and 65 percent said that it reduced cost, as opposed to 65 percent and 52 percent, respectively, among smaller firms.25 Forty percent of respondents to a survey by Buck Consultants indicated that they had measured the impact of their wellness program on the growth trend of their health care costs, and of these, 45 percent reported a reduction in that growth trend. The majority of these employers, 61 percent, reported that the reduction in growth trend of their health care costs was between two and five percentage points per year.26 There are numerous accounts of the positive impact of workplace wellness programs in many industries, regions, and types of employers. For example, a recentarticle published by theHarvard Business Reviewcited positive outcomes reported by private-sector employers along several different dimensions, including health care savings, reduced absenteeism, and employee satisfaction.27

25Kaiser Family Foundation, Employer Health Benefits: 2010 Annual Survey. 2010, The Kaiser Family Foundation, Menlo Park, CA; Health Research & Educational Trust, Chicago, IL.

26Buck Consultants, Working Well: A Global Survey of Health Promotion and Workplace Wellness Strategies. 2010, Buck Consultants: San Francisco, CA.

27Berry, L., A. Mirabito, and W. Baun, What's the Hard Return on Employee Wellness Programs? Harvard Business Review, 2010. 88(12): p. 104.

Several studies that looked at the impact of smoking cessation programs found significantly higher quit rates or less tobacco use.28 29 Smoking cessation programs typically offered education and counseling to increase social support.30 Two studies reported that individuals in the intervention group quit smoking at a rate approximately 10 percentage points higher than those in the control group, and another reported that participants were almost four times as likely as nonparticipants to reduce tobacco use.31 32 However, these effects should be interpreted with caution. One study showed significant differences in smoking rates at a one-month follow-up, but showed no significant differences in quit rates at six months, highlighting the importance of long-term follow-up to investigate the sustainability of results.33

28Heirich, M. and C.J. Sieck, Worksite cardiovascular wellness programs as a route to substance abuse prevention. J Occup Environ Med, 2000. 42(1): p. 47-56; 40; McMahon, S.D. and L.A. Jason, Social support in a worksite smoking intervention. A test of theoretical models. Behav Modif, 2000. 24(2): p. 184-201; Okechukwu, C.A., et al., MassBuilt: Effectiveness of an apprenticeship site-based smoking cessation intervention for unionized building trades workers. Cancer Causes Control, 2009. 20(6): p. 887-94; Sorensen, G., et al., A comprehensive worksite cancer prevention intervention: Behavior change results from a randomized controlled trial (United States). J Public Health Policy, 2003. 24(1): p. 5-25.

29Gold, D.B., D.R. Anderson, and S.A. Serxner,Impact of a telephone-based intervention on the reduction of health risks.Am J Health Promot, 2000. 15(2): p. 97-106; Herman, C.W., et al.,Effectiveness of an incentive-based online physical activity intervention on employee health status.Journal of Occupational and Environmental Medicine, 2006. 48(9): p. 889-895; Ozminkowski, R.J., et al.,The impact of the Citibank, NA, health management program on changes in employee health risks over time.J Occup Environ Med, 2000. 42(5): p. 502-11.

30Heirich, M. and C.J. Sieck, Worksite cardiovascular wellness programs as a route to substance abuse prevention. J Occup Environ Med, 2000. 42(1): p. 47-56; McMahon, S.D. and L.A. Jason, Social support in a worksite smoking intervention. A test of theoretical models. Behav Modif, 2000. 24(2): p. 184-201.

31Heirich, M. and C.J. Sieck, Worksite cardiovascular wellness programs as a route to substance abuse prevention. J Occup Environ Med, 2000. 42(1): p. 47-56; Okechukwu, C.A., et al., MassBuilt: Effectiveness of an apprenticeship site-based smoking cessation intervention for unionized building trades workers. Cancer Causes Control, 2009. 20(6): p. 887-94.

32In the study, 42% of participants reduced their risk for tobacco use. See Gold, D.B., D.R. Anderson, and S.A. Serxner, Impact of a telephone-based intervention on the reduction of health risks. Am J Health Promot, 2000. 15(2): p. 97-106.

33Kechukwu, C.A., et al., MassBuilt: Effectiveness of an apprenticeship site-based smoking cessation intervention for unionized building trades workers. Cancer Causes Control, 2009. 20(6): p. 887-94.

While employer sponsors generally are