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Health Insurance Discounts for Employees Who Don’t Use Tobacco

by Sally J. Reynolds

Each year thousands of Americans resolve to quit smoking, but most will be unsuccessful. Some employers have begun implementing financial incentives to motivate their health plan participants to stop using tobacco. One type of reward may be a discount on health insurance premiums for employees who don’t use tobacco or are actively trying to quit smoking.

There are several names for such a program: tobacco cessation program, tobacco surcharge, or tobacco premium, to name a few. Federal law, as set out in the Health Insurance Portability and Accountability Act (HIPAA) regulations, provides specific criteria for employers that want to embark on such a plan. The following is a guide for those of you who are interested in encouraging workplace wellness.

Benefits Complete Compliance

Help employees kick the habit
The Centers for Disease Control and Prevention reports that more deaths are caused each year by tobacco use than by all deaths from HIV, illegal drug use, alcohol use, motor vehicle injuries, suicides, and murders combined. Smoking increases the risk of dying from cancers of the lung, esophagus, larynx, and oral cavity, and smokeless tobacco causes cancer and may increase the risk for sudden death from ventricular arrhythmias. In addition to the diseases directly caused by smoking, smokers face increased health risks for conditions like coronary heart disease, stroke, bronchitis and emphysema, vascular diseases, numerous types of cancers, and aortic aneurysm.

As health care costs continue to rise, employers can save money in the long run by implementing health and wellness programs for their employees. After instituting a wellness program, you might see other long-term benefits such as increased productivity, reduced absenteeism, and improved employee morale and loyalty. Likewise, having employees who don’t use tobacco could save your company a substantial amount of money, including costs related to your group health plans.

Employers with group health plans and group health insurance issuers may wish to implement wellness programs that set specific health targets. Although this type of program may sound like prohibited discrimination against smokers and other tobacco users, the federal rules interpreting HIPAA permit some limited exceptions for properly designed “wellness programs.” Employer wellness programs aren’t limited to tobacco cessation initiatives and may include fitness programs such as gym memberships, diagnostic testing programs for health problems, and rewards for attending health education classes or weight-loss programs or following healthy lifestyle recommendations.

Workplace Wellness Workbook

Be aware of HIPAA regulations
One option for encouraging tobacco cessation available to employers is a premium differential between smokers and nonsmokers. In order for that plan not to be considered discriminatory and thus a violation of HIPAA, however, employers must be cognizant of the federal requirements for wellness programs.

In December 2006, the U.S. Department of Labor’s (DOL) Employee Benefits Security Administration, the U.S. Department of Health and Human Services, and the Treasury Department issued final regulations on the nondiscriminatory provisions of HIPAA. The regulations, which describe how the nondiscrimination provisions apply to wellness programs, are applicable to plan years beginning on or after July 1, 2007. An exception to the HIPAA nondiscrimination provisions in the regulations permits group plans to vary benefits and premiums/contributions based on whether a plan participant has met the standards of a wellness program that complies with the regulations.

While the regulations prohibit a plan from charging similarly situated individuals different premiums or contributions based on a health condition, the DOL has crafted an exception permitting a plan to establish wellness programs that allow discounts, rebates, or other incentives when a participant adheres to a program that promotes wellness or prevents disease.

To clarify the conditions of the nondiscrimination requirements, the DOL has issued further guidance in the form of a checklist, reproduced below. The checklist is intended to educate employers about what types of health promotion or disease prevention programs offered by group health plans comply with the regulations and how to determine whether your programs comply.

Wellness program checklist
A. The first day of the current plan year is ___________.
Is the date after July 1, 2007? __Yes__No

The wellness program rules are applicable for plan years beginning on or after July 1, 2007.

B. Does the plan have a wellness program? __Yes__No

The plan does not have to be entitled “wellness” to qualify, but must be a program that promotes health or prevents disease subject to the regulations.

C. Is the wellness program part of a group health plan? __Yes__No

The program is only subject to Part 7 of the Employee Retirement Income Security Act (ERISA) — the HIPAA nondiscrimination regulations — if it is part of a group health plan. If the employer operates the program as an employment policy separate from the group health plan, it is not subject to the rules discussed here.

D. Does the program discriminate based on a health factor? __Yes__No

A plan discriminates based on a health factor if it requires an individual to meet a standard related to a health factor in order to obtain a reward. Rewards can be a rebate or discount on a premium or contribution, a waiver of all or part of a cost-sharing mechanism (deductibles, copayments, or coinsurance), the absence of a surcharge, or the value of a benefit not otherwise available under the plan.

If you answered “No” to any of the above questions, stop. The plan does not maintain a program subject to the group health plan wellness program rules.

E. If the program discriminates based on a health factor, is the program saved by the benign discrimination provisions? __Yes__No

Discrimination in favor of an individual based on a health factor is permitted. The program may offer a reward to individuals based on an adverse health factor. However, this benign discrimination exception is not available if the program asks diabetics to meet a standard related to a health care factor in order to get a reward, such as requiring maintenance of a certain body mass index.

If you answered “Yes” to the previous question, stop. There are no violations of the wellness program rules.

If you answered “No” to the previous question, the wellness program bases the receipt of a reward on satisfying a standard related to a health factor and it must meet the following five compliance criteria.

F. Compliance Criteria

  1. Is the amount of the reward offered under the plan limited to 20 percent of the applicable cost of coverage? __Yes__No
    If only employees are eligible to participate, the amount of the reward must not exceed 20 percent of the cost of the employee-only coverage. If employees and dependents are eligible to participate, the reward must not exceed 20 percent of the cost of coverage in which an employee and dependents are enrolled. When more than one reward is offered, all wellness programs are combined in calculating this 20 percent limit.
  2. Is the plan reasonably designed to promote health or prevent disease? __Yes__No
    The program should have a reasonable chance of improving the health of or preventing disease in participating individuals. It may not be overly burdensome, a subterfuge for discriminating based on a health factor, or highly suspect in the method chosen to promote health or prevent disease.
  3. Are individuals who are eligible to participate given a chance to qualify at least once per year? __Yes__No
  4. Is the reward available to all similarly situated individuals? __Yes__No
    Does the program offer a reasonable alternative standard? __Yes__No
    There must be a reasonable alternative standard or waiver that provides the reward for any individual for whom: (a) it is unreasonably difficult due to a medical condition to satisfy the otherwise applicable standard; or (b) it is medically inadvisable to attempt to satisfy the otherwise applicable standard. The reasonable alternative standard may be tailored to each individual on a case-by-case basis. It is permissible for the plan or issuer to seek verification, such as a statement from the individual’s physician, that a health factor makes it unreasonably difficult or medically inadvisable for the individual to satisfy or attempt to satisfy the otherwise applicable standard.
  5. Does the plan disclose the availability of a reasonable alternative in all plan materials describing the program? __Yes__No
    “If it is unreasonably difficult due to a medical condition for you to achieve the standards for the reward under this program, call us at [telephone number] and we will work with you to develop another way to qualify for the reward.”

If you answered “Yes” to all of the five questions on wellness program criteria, there are no violations of the HIPAA wellness program rules.

If you answered “No” to any of the five questions on wellness program criteria, the plan has a wellness program compliance issue.

Testing for nicotine use
Before implementing a tobacco cessation program, you may have questions about your options for enforcing the policy. Some states don’t have specific case law or regulations governing nicotine testing. Some states do, however, have statutes governing how drug testing may be conducted. Those laws must be followed for nicotine testing as well.

State-by-state comparison of 50 employment laws in all 50 states

Bottom line
Employers can encourage good health and wellness in their workplaces by implementing tobacco cessation programs that give health insurance premium discounts to nonsmokers. However, you must ensure that your wellness programs comply with federal law. Consequently, it’s wise to have competent legal counsel review your plan before you implement it.

In addition, nicotine testing may be part of your wellness program, but if it is, you must have a clear and comprehensive written policy in your employee manual or handbook and your group health plan documents.

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