When it comes to health plans that penalize unhealthy workers, the Department of Labor has drawn a line in the sand.
Regulatory guidelines recently issued close a legal loophole that could have allowed employers to make health insurance more expensive for unhealthy workers than for their colleagues.
In December, the department's Employee Benefits Security Administration issued guidelines to its national and regional offices on "supplemental coverage." This is a form of health insurance covering co-pays and deductibles in regular insurance.
Supplemental coverage is generally used to fill such gaps in either Medicare or Tricare, the health-care plan for current and retired military members.
But in recent years, some employers have incorporated a form of supplemental insurance into their wellness programs. Under such programs, workers enroll in an employer-sponsored health plan with a high insurance deductible.
They can offset the deductible by earning "wellness credits" for meeting certain health benchmarks -- such as for cholesterol count -- issued under a separate supplemental policy.
Proponents liken the rewards to giving a good-driver discount, arguing 70% of health-care expenses are lifestyle-related. Exposure to higher out-of-pocket costs motivates employees to improve their health, which saves employers money.
But lawyers and consultants have voiced concerns that such programs could hurt employees with health problems. In some instances, unhealthy employees could face insurance deductibles more than $1,000 higher than healthier co-workers'.
While uncommon, such incentive programs are gaining traction among smaller employers, who are the most at risk from rising health costs. They also are attracting the attention of larger employers seeking more new ways to reduce medical expenses and boost productivity.
In most states, people with health problems already pay more for health insurance in the individual market. The federal law, Health Insurance Portability and Accountability Act, or HIPAA, requires all workers covered under the same employer-sponsored plan to pay the same premiums regardless of their health.
Last July, federal agencies finalized rules granting some exceptions from HIPAA to certain wellness programs. Under the rules, employers can offer financial incentives of as much as 20% of the cost of covering an employee.
Popular are discounts to nonsmokers or contributions toward insurance premiums for workers who complete health-risk assessments or have their blood pressure checked.
Crucially, if an incentive is based on the satisfaction of a health standard -- say, not smoking -- a "reasonable alternative" way of earning the reward must be available to employees who can't achieve the goal, says Sharon Cohen of consulting firm Watson Wyatt Worldwide Inc..
A smoker addicted to nicotine (a medical condition) could avoid a surcharge by participating in a smoking-cessation program, she says.
Supplemental insurance is exempt from HIPAA, giving employers the potential to penalize or reward employees based on their health status.
But not all coverage "being marketed as similar supplemental coverage actually qualifies as such," the Department of Labor said in a release dated Dec. 7, setting out four standards that policies must meet to be exempt from HIPAA.
"The kicker" for wellness programs, say lawyers and consultants, is a requirement that a supplemental policy that is group health-insurance coverage "must not differentiate among individuals in eligibility, benefits or premiums based on any health factor of an individual." Health status, medical conditions and genetic information are considered health factors.
The Department of Labor (DOL) said it may bring "enforcement actions" against rule breakers. It didn't name specific vendors or employers who might need to make changes.
"The DOL's release ensures that supplemental health coverage can't or won't become an end run around the HIPAA wellness rules," says Andy Anderson, of counsel with law firm Morgan Lewis & Bockius and an expert in work-based health benefits.
Without the Department of Labor's release, carriers and consultants could have designed super-wellness programs that were more punitive or delivered greater incentives than permissible under the HIPAA wellness rules, he says.
In general, Mr. Anderson advises any employer who has or is thinking about offering supplemental health insurance to seek independent legal advice about whether it complies with the department's rules and the HIPAA wellness requirements.