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Guest Article

Deloitte logo

(From the December 18, 2006 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Final HIPAA Nondiscrimination and Wellness Program Regulations

The Departments of Health and Human Services, Labor, and Treasury on December 13, 2006 issued final regulations on the Health Insurance Portability and Accountability Act's (HIPAA) group health plan nondiscrimination and wellness plan rules. 71 FR 75014 (December 13, 2006). As a general matter, the final regulations do not substantively change the interim final HIPAA nondiscrimination rules or the proposed wellness plan rules the Departments issued in 2001. However, the final regulations do clarify a number of issues. The final regulations are effective February 12, 2007, and apply for plan years beginning on or after July 1, 2007.

Also on December 13, the Treasury Department issued final guidance on the HIPAA nondiscrimination rule exception for certain grandfathered church plans. 71 FR 75055 (December 13, 2006). Like the HIPAA nondiscrimination regulations, this guidance is effective February 12, 2007, and applies to plan years beginning on or after July 1, 2007.

Basic Principles

The HIPAA nondiscrimination provisions set forth eight "health factors" that may not be used to discriminate in health coverage among individuals. 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 participation in risky recreational activities, such as motorcycling, snowmobiling, skiing, etc.), and disability. These terms are largely overlapping and, in combination, include any factor related to an individual's health. Impermissible discrimination includes applying different eligibility rules, providing different benefits, or charging different premiums, copays, etc. to individuals based on one or more of these health factors.

It is important to note that these rules do not require employers to provide coverage for any specific benefit. But if a plan does provide a specific benefit, it must be uniformly available to all similarly situated individuals. Likewise, plans may not place restrictions on benefits that apply only to certain individuals based on any health factor. For example, a plan can limit or exclude benefits relating to a specific disease or condition, limit or exclude benefits for certain types of treatments or drugs, or limit or exclude benefits for treatments that are experimental or not medically necessary. However, these limitations or exclusions must be applied uniformly to all similarly situated individuals and may not be directed at individual participants or beneficiaries based on any health factor.

Additionally, the HIPAA nondiscrimination rules do not prohibit employers from providing different health benefits to different groups of employees, so long as the distinction is a bona fide employment-based classification consistent with the employer's usual business practice. Thus the HIPAA nondiscrimination rules do not prohibit employers from providing different health benefits to employees based on different occupations or geographic locations, so long as the differences are not directed at individual participants or beneficiaries and are not based on any health factors.

Finally, there is an exception to the HIPAA nondiscrimination rules for wellness programs employers increasingly are using to encourage healthy behaviors and lifestyles. If the wellness program otherwise would violate the HIPAA nondiscrimination rules, it must satisfy certain specific requirements in order to qualify for this exception.

Applying the HIPAA Nondiscrimation Rules to HRAs

A burning question among benefits practitioners has been whether health reimbursement arrangements (HRAs) that permit participants to carry over unused balances for use in future years violate the HIPAA nondiscrimination rules. Obviously, those who have fewer medical expenses will build up bigger balances over time. Thus, the question is whether HRAs impermissibly favor participants with less claims experience -- a health factor.

The final regulations include the following example to confirm HRAs that allow carryovers do not violate the HIPAA nondiscrimination rules.

Example 8. (i) Facts. An employer sponsors a group health plan that is available to all current employees. Under the plan, the medical care expenses of each employee (and the employee's dependents) are reimbursed up to an annual maximum amount. The maximum reimbursement amount with respect to an employee for a year is $1500 multiplied by the number of years the employee has participated in the plan, reduced by the total reimbursements for prior years.

(ii) Conclusion. In this Example 8, the variable annual limit does not violate this paragraph (b)(2)(i). Although the maximum reimbursement amount for a year varies among employees within the same group of similarly situated individuals based on prior claims experience, employees who have participated in the plan for the same length of time are eligible for the same total benefit over that length of time (and the restriction on the maximum reimbursement amount is not directed at any individual participants or beneficiaries based on any health factor).

Late Enrollees and Special Enrollees

Plans may treat late enrollees differently than those who enrolled during the normal enrollment period. However, plans may not treat HIPAA "special enrollees" (i.e., newborns, adoptees, newly married) differently. This difference is based on the fact HIPAA was designed to encourage individuals to enroll in health coverage when first eligible and to maintain coverage for as long as they continue to be eligible. Consequently, permitting plans and issuers to treat late enrollees less favorably than other enrollees is consistent with this objective. However, the HIPAA special enrollment regulations specifically require plans to treat special enrollees the same as individuals who enroll when first eligible.

Source-of-Injury Restrictions

A plan cannot exclude a person from plan eligibility because the individual engages in certain recreational activities, although benefits for a particular injury can, in some cases, be excluded based on the source of an injury. Under the final regulations, if a plan generally provides benefits for a type of injury, the plan may not use a source-of-injury restriction to deny benefits otherwise provided for treatment of the injury if it results from a medical condition (including both physical and mental health conditions) or an act of domestic violence. For example, a plan cannot exclude all motorcycle riders from the plan because motorcycling is specifically included in the "evidence of insurability" health factor. But a plan generally could exclude coverage for all injuries resulting from riding on a motorcycle. However, if the motorcycle rider lost control of the bike because she had an epileptic seizure, the injury would have to be covered because it resulted from epilepsy, a medical condition.

The final regulations also include an example to clarify that plans generally may not refuse to cover injuries that otherwise would be covered on the grounds they were self-inflicted or were sustained in connection with a suicide or attempted suicide if the injuries resulted from a medical condition such as depression. The final regulations also clarify that this rule applies even if the medical condition (i.e., depression) was not diagnosed before the injury occurred.

Preexisting Condition Exclusions

The regulations confirm that preexisting conditions can be applied so long as the required HIPAA conditions regarding crediting previous coverage are followed and other health related factors are not applied. For example, a twelve-month preexisting condition exclusion (with appropriate credits for prior coverage) is permissible. But a general twelve-month exclusion that is waived after six months if no claims are filed would violate the HIPAA nondiscrimination rules because it discriminates among individuals based on a health factor -- i.e., use of medical services.

Prohibited Discrimination in Premiums or Contributions

A plan may not impose higher premium or other contribution requirements on an individual based on any health factor that relates to that individual or a dependent of that individual. For this purpose discounts, rebates, payments in kind, or other premium differential mechanisms are taken into account. However, as noted a group health plan may establish premium or contribution differentials through a wellness program, as discussed in more detail below.

In general, the rules do not restrict the amount that an employer may be quoted or charged by an issuer for coverage of a group of similarly situated individuals. But the rules do prohibit so-called "list billing." List billing is defined as billing practices using separate individual rates that vary based, in part, on the health factors of the individuals who are eligible to participate in the plan. The rules do not prohibit an issuer from using individual health data to generate an overall group rate, even though that overall rate may be higher based on the health experience of individuals. For example, an issuer could not propose a group rate with a surcharge for an individual, even if the employer covered the surcharge.

Similarly Situated Individuals

The rules generally permit different treatment of two or more groups of similarly situated individuals if the distinction between or among the groups is based on a bona fide employment-based classification consistent with the employer's usual business practice. The validity of a bona fide employment-based classification is determined based on all the relevant facts and circumstances, including whether the employer uses the classification for other purposes than merely qualification for health coverage (for example, determining eligibility for other employee benefits or determining other terms of employment). Such distinctions can be based on full-time versus part-time status, different geographic location, membership in a collective bargaining unit, date of hire, length of service, current employee versus former employee status, and different occupations. Beneficiaries may be treated differently than participants.

For example, all employees working part-time may be charged higher premiums. By contrast, in a seven person shop where six employees have the same duties and title and one individual a different title and duties, the employer could not impose different premiums on this one employee the year after that employee had unusually high medical claims.

Nonconfinement and Actively At Work Clauses

The HIPAA nondiscrimination rules prohibit plans from denying benefits at the time coverage would otherwise take effect if an individual is confined to a hospital or other health care institution -- so-called "nonconfinement clauses." Also prohibited are provisions that require an employee to be "actively at work" to begin health care coverage, unless the plan defines "actively at work" to include those who are not at work because of a health factor.

The final regulations clarify the relationship between HIPAA's prohibition of nonconfinement clauses and the extension of benefit rules in some states. In general, many states require insurance issuers to continue insuring someone who is in the hospital on the date coverage otherwise would end. So what happens when state law requires an insurance issuer to continue coverage for an individual who is hospitalized, and the HIPAA nondiscrimination rules require a second plan to begin coverage for the same individual? The final regulations explain that state law cannot change the succeeding plan's HIPAA obligations, and that if both the prior and succeeding plans are required to maintain coverage simultaneously, the state's coordination of benefits laws continue to apply.

More Favorable Treatment for Adverse Health Factors Permitted

The HIPAA nondiscrimination rules do not prohibit plans from giving more favorable treatment to those with adverse health factors. For example, a plan could continue coverage for an employee terminating because of a disability, even though the other terminating employees could not continue coverage (except as provided by COBRA) or for a disabled child over the age of 21, although other children over 21 are not covered by the plan.

Wellness Programs

The HIPAA nondiscrimination exception for wellness programs is relevant only for programs "under which any of the conditions for obtaining a reward is based on an individual satisfying a standard related to a health factor ...." Other wellness programs do not have to qualify for the exception because they are consistent with HIPAA's nondiscrimination requirements. The final regulations provide the following examples of wellness programs that do not violate the HIPAA nondiscrimination rules.

  • A program that reimburses all or part of the costs for membership in a fitness center.
  • A diagnostic testing program that provides a reward for participation and does not base any part of the reward on outcomes.
  • A program that encourages preventive care through the waiver of the copayment or deductible requirement under a group health plan for the costs of, for example, prenatal care or well-baby visits.
  • A program that reimburses employees for the costs of smoking cessation programs without regard to whether the employee quits smoking.
  • A program that provides a reward to employees for attending a monthly health education seminar.

However, any wellness program that provides a reward based on the ability of an individual to meet a health standard will violate the HIPAA nondiscrimination rules unless it satisfies five conditions.

  • The reward for the wellness program, coupled with the reward for other wellness programs with respect to the plan that require satisfaction of a standard related to a health factor, must not exceed 20 percent of the cost of employee-only coverage under the plan. If any of the employee's dependents are enrolled in the program, the reward may not exceed 20 percent of the coverage in which the employee and his or her dependent(s) is enrolled.
  • The program must be reasonably designed to promote health or prevent disease. This is satisfied if the program has a reasonable chance of improving the health or preventing disease in participating individuals and is not overly burdensome, is not a subterfuge for discriminating based on a health factor, and is not highly suspect in the method chosen to promote health or prevent disease. According to the preamble to the final regulations, "There does not need to be a scientific record that the method promotes wellness to satisfy this standard."
  • The program must give individuals eligible for the program the opportunity to qualify for the reward under the program at least once per year.
  • The reward under the program must be available to all similarly situated individuals. A reasonable alternative standard for obtaining the reward must be available for those with a health factor that makes it unreasonably difficult or medically inadvisable to satisfy or attempt to satisfy the otherwise applicable standard. The "reasonable" standard, according to the preamble to the final regulations, is designed to prohibit "bizarre, extreme, or illegal requirements in a wellness program."
  • The plan must disclose in all plan materials describing the terms of the program the availability of the reasonable alternative standard for obtaining the reward. If plan materials mention the program, but do not describe its terms, this disclosure of the reasonable alternative standard is not required. The final regulations include sample language plans can use to meet this disclosure requirement.

State and Local Government Opt Out

Under the special provisions of Public Health Safety Act ? 2721(b)(2), self-insured plans of state and local governments may opt out of these nondiscrimination requirements (as applied by PHSA ? 2702). If a plan opts out and later decides to come into compliance, it must notify individuals who were previously denied enrollment due to a health factor and give them an opportunity to enroll in the plan. The opportunity to enroll must last at least 30 days, and those who take advantage of the opportunity may not be treated as a late enrollee or special enrollee. Those who choose to enroll must be given coverage retroactive to the first day for which the plan's opt out ceased to be in effect.

Interaction with Other Federal Discrimination Laws

At the request of the Equal Employment Opportunity Commission, the final regulations admonish employers to not confuse the HIPAA nondiscrimination rules with other federal discrimination laws -- such as the Americans with Disabilities Act (ADA) and the Civil Rights Act. For example, the HIPAA nondiscrimination rules do not prevent plans from excluding or limiting coverage for AIDs, but the ADA generally would prohibit this as a disability-based distinction. Likewise, plans that do not cover prescription contraceptives, but do cover other preventive treatments, violate Title VII of the Civil Rights Act because only women use prescription contraceptives.

Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Laura Morrison 202.879.5653, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Carlisle Toppin 202.220.2067, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

Copyright 2006, Deloitte.

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