Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Proposed Rules 1421

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

[REG–114084–00]

RIN 1545–AY34

DEPARTMENT OF LABOR

Pension and Welfare Benefits

Administration

29 CFR Part 2590

RIN 1210–AA77

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Health Care Financing Administration

45 CFR Part 146

RIN 0938–AK19

Notice of Proposed Rulemaking for

Bona Fide Wellness Programs

AGENCIES: Internal Revenue Service,

Department of the Treasury; Pension

and Welfare Benefits Administration,

Department of Labor; Health Care

Financing Administration, Department

of Health and Human Services.

ACTION: Notice of proposed rulemaking

and request for comments.

SUMMARY: This proposed rule would

implement and clarify the term ‘‘bona

fide wellness program’’ as it relates to

regulations implementing the

nondiscrimination provisions of the

Internal Revenue Code, the Employee

Retirement Income Security Act, and

the Public Health Service Act, as added

by the Health Insurance Portability and

Accountability Act of 1996.

DATES: Written comments on this notice

of proposed rulemaking are invited and

must be received by the Departments on

or before April 9, 2001.

ADDRESSES: Written comments should

be submitted with a signed original and

three copies (except for electronic

submissions to the Internal Revenue

Service (IRS) or Department of Labor) to

any of the addresses specified below.

Any comment that is submitted to any

Department will be shared with the

other Departments.

Comments to the IRS can be

addressed to: CC:M&SP:RU (REG–

114084–00), Room 5226, Internal

Revenue Service, POB 7604, Ben

Franklin Station, Washington, DC

20044.

In the alternative, comments may be

hand-delivered between the hours of 8

a.m. and 5 p.m. to: CC:M&SP:RU (REG–

114084–00), Courier’s Desk, Internal

Revenue Service, 1111 Constitution

Avenue, NW., Washington, DC 20224.

Alternatively, comments may be

transmitted electronically via the IRS

Internet site at: http://www.irs.gov/

tax_regs/regslist.html.

Comments to the Department of Labor

can be addressed to: U.S. Department of

Labor Pension and Welfare Benefits

Administration, 200 Constitution

Avenue NW., Room C–5331,

Washington, DC 20210, Attention:

Wellness Program Comments.

Alternatively, comments may be

hand-delivered between the hours of 9

a.m. and 5 p.m. to the same address.

Comments may also be transmitted by email to: Wellness@pwba.dol.gov.

Comments to HHS can be addressed

to: Health Care Financing

Administration, Department of Health

and Human Services, Attention: HCFA–

2078–P, P.O. Box 26688, Baltimore, MD

21207.

In the alternative, comments may be

hand-delivered between the hours of

8:30 a.m. and 5 p.m. to either:

Room 443–G, Hubert Humphrey

Building, 200 Independence Avenue,

SW., Washington, DC 20201

or

Room C5–14–03, 7500 Security

Boulevard, Baltimore, MD 21244–

1850

All submissions to the IRS will be

open to public inspection and copying

in room 1621, 1111 Constitution

Avenue, NW., Washington, DC from 9

a.m. to 4 p.m.

All submissions to the Department of

Labor will be open to public inspection

and copying in the Public Documents

Room, Pension and Welfare Benefits

Administration, U.S. Department of

Labor, Room N–1513, 200 Constitution

Avenue, NW., Washington, DC from

8:30 a.m. to 5:30 p.m.

All submissions to HHS will be open

to public inspection and copying in

room 309–G of the Department of Health

and Human Services, 200 Independence

Avenue, SW., Washington, DC from 8:30

a.m. to 5 p.m.

FOR FURTHER INFORMATION CONTACT: Russ

Weinheimer, Internal Revenue Service,

Department of the Treasury, at (202)

622–6080; Amy J. Turner, Pension and

Welfare Benefits Administration,

Department of Labor, at (202) 219–4377;

or Ruth A. Bradford, Health Care

Financing Administration, Department

of Health and Human Services, at (410)

786–1565.

SUPPLEMENTARY INFORMATION:

Customer Service Information

Individuals interested in obtaining

additional information on HIPAA’s

nondiscrimination rules may request a

copy of the Department of Labor’s

booklet entitled ‘‘Questions and

Answers: Recent Changes in Health Care

Law’’ by calling the PWBA Toll-Free

Publication Hotline at 1–800–998–7542

or may request a copy of the Health Care

Financing Administration’s new

publication entitled ‘‘Protecting Your

Health Insurance Coverage’’ by calling

(410) 786–1565. Information on

HIPAA’s nondiscrimination rules and

other recent health care laws is also

available on the Department of Labor’s

website (http://www.dol.gov/dol/pwba)

and the Department of Health and

Human Services’ website (http://

hipaa.hcfa.gov).

I. Background

The Health Insurance Portability and

Accountability Act of 1996 (HIPAA),

Public Law 104–191, was enacted on

August 21, 1996. HIPAA amended the

Internal Revenue Code of 1986 (Code),

the Employee Retirement Income

Security Act of 1974 (ERISA), and the

Public Health Service Act (PHS Act) to

provide for, among other things,

improved portability and continuity of

health coverage. HIPAA added section

9802 of the Code, section 702 of ERISA,

and section 2702 of the PHS Act, which

prohibit discrimination in health

coverage. However, the HIPAA

nondiscrimination provisions do not

prevent a plan or issuer from

establishing discounts or rebates or

modifying otherwise applicable

copayments or deductibles in return for

adherence to programs of health

promotion and disease prevention.

Interim final rules implementing the

HIPAA provisions were first made

available to the public on April 1, 1997

(published in the Federal Register on

April 8, 1997, 62 FR 16894) (April 1997

interim rules).

In the preamble to the April 1997

interim rules, the Departments invited

comments on whether additional

guidance was needed concerning,

among other things, the permissible

standards for determining bona fide

wellness programs. The Departments

also stated that they intend to issue

further regulations on the

nondiscrimination rules and that in no

event would the Departments take any

enforcement action against a plan or

issuer that had sought to comply in

good faith with section 9802 of the

Code, section 702 of ERISA, and section

2702 of the PHS Act before the

additional guidance is provided. The

new interim regulations relating to the

HIPAA nondiscrimination rules

(published elsewhere in this issue of the

1422 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Proposed Rules

Federal Register) do not include

provisions relating to bona fide wellness

programs. Accordingly, the period for

good faith compliance continues with

respect to those provisions until further

guidance is issued. Compliance with the

provisions of these proposed regulations

constitutes good faith compliance with

the statutory provisions relating to

wellness programs.

II. Overview of the Proposed

Regulations

The HIPAA nondiscrimination

provisions generally prohibit a plan or

issuer from charging similarly situated

individuals different premiums or

contributions based on a health factor.

In addition, under the interim

regulations published elsewhere in this

issue of the Federal Register, costsharing mechanisms such as

deductibles, copayments, and

coinsurance are considered restrictions

on benefits. Thus, they are subject to the

same rules as are other restrictions on

benefits; that is, they must apply

uniformly to all similarly situated

individuals and must not be directed at

individual participants or beneficiaries

based on any health factor of the

participants or beneficiaries. However,

the HIPAA nondiscrimination

provisions do not prevent a plan or

issuer from establishing premium

discounts or rebates or modifying

otherwise applicable copayments or

deductibles in return for adherence to

programs of health promotion and

disease prevention. Thus, there is an

exception to the general rule prohibiting

discrimination based on a health factor

if the reward, such as a premium

discount or waiver of a cost-sharing

requirement, is based on participation

in a program of health promotion or

disease prevention. The April 1997

interim rules, the interim regulations

published elsewhere in this issue of the

Federal Register, and these proposed

regulations refer to programs of health

promotion and disease prevention

allowed under this exception as ‘‘bona

fide wellness programs.’’ In order to

prevent the exception to the

nondiscrimination requirements for

bona fide wellness programs from

eviscerating the general rule contained

in the HIPAA nondiscrimination

provisions, these proposed regulations

impose certain requirements on

wellness programs providing rewards

that would otherwise discriminate

based on a health factor.

A wide range of wellness programs

exist to promote health and prevent

disease. However, many of these

programs are not subject to the bona fide

wellness program requirements. The

requirements for bona fide wellness

programs apply only to a wellness

program that provides a reward based

on the ability of an individual to meet

a standard that is related to a health

factor, such as a reward conditioned on

the outcome of a cholesterol test.

Therefore, without having to comply

with the requirements for a bona fide

wellness program, a wellness program

could—

• Provide voluntary testing of

enrollees for specific health problems

and make recommendations to address

health problems identified, if the

program did not base any reward on the

outcome of the health assessment;

• Encourage preventive care through

the waiver of the copayment or

deductible requirement for the costs of

well-baby visits;

• Reimburse employees for the cost of

health club memberships, without

regard to any health factors relating to

the employees; or

• Reimburse employees for the costs

of smoking cessation programs, without

regard to whether the employee quits

smoking.

A wellness program that provides a

reward based on the ability of an

individual to meet a standard related to

a health factor violates the interim

regulations published elsewhere in this

issue of the Federal Register unless it is

a bona fide wellness program. Under

these proposed regulations, a wellness

program must meet four requirements to

be a bona fide wellness program.

First, the total reward that may be

given to an individual under the plan

for all wellness programs is limited. A

reward can be in the form of a discount,

a rebate of a premium or contribution,

or a waiver of all or part of a costsharing mechanism (such as

deductibles, copayments, or

coinsurance), or the absence of a

surcharge. 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 a specified percentage of the

cost of employee-only coverage under

the plan. The cost of employee-only

coverage is determined based on the

total amount of employer and employee

contributions for the benefit package

under which the employee is receiving

coverage.

The proposed regulations specify

three alternative percentages: 10, 15,

and 20. The Departments welcome

comments on the appropriate level for

the percentage. Comments will be taken

into account in determining the

standard for the final regulations.

Several commenters on the April 1997

regulations suggested that the amount of

a reward should be permitted if it is

actuarially determined based on the

costs associated with the health factor

measured under the wellness program.

However, in some cases, the resulting

reward (or penalty) might be so large as

to have the effect of denying coverage to

certain individuals. The percentage

limitation in the proposed regulations is

designed to avoid this result. The

percentage limitation also avoids the

additional administrative costs of a

reward based on actuarial cost.

The Departments recognize that there

may be some programs that currently

offer rewards, individually or in the

aggregate, that exceed the specified

percentage. However, as noted below in

the economic analysis, data is scarce

regarding practices of wellness

programs. Thus, the Departments

specifically request comments on the

appropriateness of the specified

percentage of the cost of employee-only

coverage under a plan as the maximum

reward for a bona fide wellness

program, including whether a larger

amount should be allowed for wellness

programs that include participation by

family members (i.e., the specified

percentage of the cost of family

coverage). Note also that, as stated

above, the period for good faith

compliance continues with respect to

whether wellness programs satisfy the

statutory requirements. While

compliance with these proposed

regulations constitutes good faith

compliance with the statutory

provisions, it is possible that, based on

all the facts and circumstances, a plan’s

wellness program that provides a

reward in excess of the specified range

of percentages of the cost of employeeonly coverage may also be found to meet

the good faith compliance standard.

Under these proposed regulations, the

second requirement to be a bona fide

wellness program is that the program

must be reasonably designed to promote

good health or prevent disease for

individuals in the program. This

requirement prevents a program from

being a subterfuge for merely imposing

higher costs on individuals based on a

health factor by requiring a reasonable

connection between the standard

required under the program and the

promotion of good health and disease

prevention. Among other things, a

program is not reasonably designed to

promote good health or prevent disease

unless the program gives individuals

eligible for the program the opportunity

to qualify for the reward under the

program at least once per year. In

contrast, a program that imposes a

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Proposed Rules 1423

1Under the Diagnostic and Statistical Manual of

Mental Disorders, Fourth Edition, American

Psychiatric Association, 1994 (DSM IV), nicotine

addiction is a medical condition. See also Rev. Rul.

99–28, 1999–25 I.R.B. 6 (June 21, 1999), citing a

report of the Surgeon General stating that scientists

in the field of drug addiction agree that nicotine,

a substance common to all forms of tobacco, is a

powerfully addictive drug.

reward or penalty for the duration of the

individual’s participation in the plan

based solely on health factors present

when an individual first enrolls in a

plan is not reasonably designed to

promote health or prevent disease

(because, if the individual cannot

qualify for the reward by adopting

healthier behavior after initial

enrollment, the program does not have

any connection to improving health).

The third requirement to be a bona

fide wellness program under these

proposed regulations is that the reward

under the program must be available to

all similarly situated individuals. The

April 1997 interim rules provided that

if, under the design of the wellness

program, enrollees might not be able to

achieve a program standard due to a

health factor, the program would not be

a bona fide wellness program. These

proposed regulations increase flexibility

for plans by allowing plans to make

individualized adjustments to their

wellness programs to address the health

factors of the particular individuals for

whom it is unreasonably difficult to

qualify for the benefits under the

program. Specifically, the program must

allow any individual for whom it is

unreasonably difficult due to a medical

condition (or for whom it is medically

inadvisable to attempt) to satisfy the

initial program standard an opportunity

to satisfy a reasonable alternative

standard. The examples clarify that a

reasonable alternative standard must

take into account the relevant health

factor of the individual who needs the

alternative. A program does not need to

establish the specific reasonable

alternative standard before the program

commences. To satisfy this third

requirement for being a bona fide

wellness program, it is sufficient to

determine a reasonable alternative

standard once a participant informs the

plan that it is unreasonably difficult for

the participant due to a medical

condition to satisfy the general standard

(or that it is medically inadvisable for

the participant to attempt to achieve the

general standard) under the program.

Many commenters asked how the

bona fide wellness program

requirements apply to programs that

provide a reward for not smoking. An

example in the proposed regulations

clarifies that if it is unreasonably

difficult for an individual to stop

smoking due to an addiction to

nicotine,1 the individual must be

provided a reasonable alternative

standard to obtain the reward.

The fourth requirement to be a bona

fide wellness program under the

proposed regulations is that all plan

materials describing the terms of the

program must disclose the availability

of a reasonable alternative standard. The

proposed regulations include model

language that can be used to satisfy this

requirement; examples also illustrate

substantially similar language that

would satisfy the requirement.

The proposed regulations contain two

clarifications of this fourth requirement.

First, plan materials are not required to

describe specific reasonable alternative

standards. It is sufficient to disclose that

some reasonable alternative standard

will be made available. Second, any

plan materials that describe the general

standard would also have to disclose the

availability of a reasonable alternative

standard. However, if the program is

merely mentioned (and does not

describe the general standard),

disclosure of the availability of a

reasonable alternative standard is not

required.

III. Economic Impact and Paperwork

Burden

Summary—Department of Labor and

Department of Health and Human

Services

Under the proposed regulation, health

plans generally may vary employee

premium contributions or benefit levels

across similarly situated individuals

based on health status factors only in

connection with bona fide wellness

programs. The regulation establishes

four requirements for such bona fide

wellness programs. It (1) limits the

permissible amount of variation in

employee premium or benefit levels; (2)

requires that programs be reasonably

designed to promote health or prevent

disease; (3) requires programs to permit

plan participants who for medical

reasons would incur unreasonable

difficulty to satisfy the programs’ initial

wellness standards to satisfy reasonable

alternative standards instead; and (4)

requires certain plan materials to

disclose the availability of such

alternative standards. The Departments

carefully considered the costs and

benefits attendant to these requirements.

The Departments believe that the

benefits of these requirements exceed

their costs.

The Departments anticipate that the

proposed regulation will result in

transfers of cost among plan sponsors

and participants and in new economic

costs and benefits.

Economic benefits will flow from plan

sponsors’ efforts to maintain wellness

programs’ effectiveness where discounts

or surcharges are reduced and from

plans sponsors’ provision of reasonable

alternative standards that help improve

affected plan participants’ health habits

and health. The result will be fewer

instances where wellness programs

merely shift costs to high risk

individuals and more instances where

they succeed at improving such

individuals’ health habits and health.

Transfers will arise because the size of

some discounts and surcharges will be

reduced, and because some plan

participants who did not satisfy

wellness programs’ initial standards

will satisfy alternative standards. These

transfers are estimated to total between

$18 million and $46 million annually.

(The latter figure is an upper bound,

reflecting the case in which all eligible

participants pursue and satisfy

alternative standards.)

New economic costs may be incurred

if reductions in discounts or surcharges

reduce wellness programs’ effectiveness,

but this effect is expected to be very

small because reductions will be small

and relatively few plans and

participants will be affected. Other new

economic costs will be incurred by plan

sponsors to make available reasonable

alternative standards where required.

The Departments were unable to

estimate these costs but are confident

that these costs in combination with the

transfers referenced above will not

exceed the estimate of the transfers

alone. Affected plan sponsors can

satisfy the proposed regulation’s third

requirement by making available any

reasonable standard they choose,

including low cost alternatives. It is

unlikely that plan sponsors would

choose alternative standards whose cost,

in combination with costs transferred

from participants who satisfy them,

would exceed the cost of providing

discounts or waiving surcharges for all

eligible participants.

Executive Order 12866—Department of

Labor and Department of Health and

Human Services

Under Executive Order 12866, the

Departments must determine whether a

regulatory action is ‘‘significant’’ and

therefore subject to the requirements of

the Executive Order and subject to

review by the Office of Management and

Budget (OMB). Under section 3(f), the

order defines a ‘‘significant regulatory

action’’ as an action that is likely to

result in a rule (1) having an annual

effect on the economy of $100 million

1424 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Proposed Rules

or more, or adversely and materially

affecting a sector of the economy,

productivity, competition, jobs, the

environment, public health or safety, or

State, local or tribal governments or

communities (also referred to as

‘‘economically significant’’); (2) creating

serious inconsistency or otherwise

interfering with an action taken or

planned by another agency; (3)

materially altering the budgetary

impacts of entitlement grants, user fees,

or loan programs or the rights and

obligations of recipients thereof; or (4)

raising novel legal or policy issues

arising out of legal mandates, the

President’s priorities, or the principles

set forth in the Executive Order.

Pursuant to the terms of the Executive

Order, it has been determined that this

action raises novel policy issues arising

out of legal mandates. Therefore, this

notice is ‘‘significant’’ and subject to

OMB review under Section 3(f)(4) of the

Executive Order. Consistent with the

Executive Order, the Departments have

assessed the costs and benefits of this

regulatory action. The Departments’

assessment, and the analysis underlying

that assessment, is detailed below. The

Departments performed a

comprehensive, unified analysis to

estimate the costs and benefits

attributable to the interim regulation for

purposes of compliance with Executive

Order 12866, the Regulatory Flexibility

Act, and the Paperwork Reduction Act.

Statement of Need for Proposed Action

These interim regulations are needed

to clarify and interpret the HIPAA

nondiscrimination provisions

(Prohibiting Discrimination Against

Individual Participants and

Beneficiaries Based on Health Status)

under Section 702 of the Employee

Retirement Income Security Act of 1974

(ERISA), Section 2702 of the Public

Health Service Act, and Section 9802 of

the Internal Revenue Code of 1986. The

provisions are needed to ensure that

group health plans and group health

insurers and issuers do not discriminate

against individuals, participants, and

beneficiaries based on any health factors

with respect to health care premiums.

Additional guidance was required to

define bona fide wellness programs.

Costs and Benefits

The Departments anticipate that the

proposed regulation will result in

transfers of cost among plans sponsors

and participants and in new economic

costs and benefits. The economic

benefits of the regulation will include a

reduction in instances where wellness

programs merely shift costs to high risk

individuals and an increase in instances

where they succeed at improving such

individuals’ health habits and health.

Transfers are estimated to total between

$18 million and $46 million annually.

The Departments were unable to

estimate new economic costs but are

confident that these costs in

combination with the transfers

referenced above will not exceed the

estimate of the transfers alone. The

Departments believe that the

regulation’s benefits will exceed its

costs. Their unified analysis of the

regulation’s costs and benefits is

detailed later in this preamble.

Regulatory Flexibility Act—Department

of Labor and Department of Health and

Human Services

The Regulatory Flexibility Act (5

U.S.C. 601 et seq.) (RFA) imposes

certain requirements with respect to

Federal rules that are subject to the

notice and comment requirements of

section 553(b) of the Administrative

Procedure Act (5 U.S.C. 551 et seq.) and

which are likely to have a significant

economic impact on a substantial

number of small entities. Unless an

agency certifies that a proposed rule

will not have a significant economic

impact on a substantial number of small

entities, section 603 of the RFA requires

that the agency present an initial

regulatory flexibility analysis (IRFA) at

the time of the publication of the notice

of proposed rulemaking describing the

impact of the rule on small entities and

seeking public comment on such

impact. Small entities include small

businesses, organizations and

governmental jurisdictions.

For purposes of analysis under the

RFA, PWBA proposes to continue to

consider a small entity to be an

employee benefit plan with fewer than

100 participants. The basis of this

definition is found in section 104(a)(2)

of the Employee Retirement Income

Security Act of 1974 (ERISA), which

permits the Secretary of Labor to

prescribe simplified annual reports for

pension plans which cover fewer than

100 participants. Under section

104(a)(3), the Secretary may also

provide for exemptions or simplified

annual reporting and disclosure for

welfare benefit plans. Pursuant to the

authority of section 104(a)(3), the

Department of Labor has previously

issued at 29 CFR 2520.104–20,

2520.104–21, 2520.104–41, 2520.104–46

and 2520.104b–10 certain simplified

reporting provisions and limited

exemptions from reporting and

disclosure requirements for small plans,

including unfunded or insured welfare

plans covering fewer than 100

participants and which satisfy certain

other requirements.

Further, while some large employers

may have small plans, in general most

small plans are maintained by small

employers. Thus, PWBA believes that

assessing the impact of this proposed

rule on small plans is an appropriate

substitute for evaluating the effect on

small entities. For purposes of their

unified IFRA, the Departments adhered

to PWBA’s proposed definition of small

entities. The definition of small entity

considered appropriate for this purpose

differs, however, from a definition of

small business which is based on size

standards promulgated by the Small

Business Administration (SBA) (13 CFR

121.201) pursuant to the Small Business

Act (15 U.S.C. 631 et seq.). The

Departments therefore request

comments on the appropriateness of the

size standard used in evaluating the

impact of this proposed rule on small

entities.

Under this proposed regulation,

health plans generally may vary

employee premium contributions or

benefit levels across similarly situated

individuals based on health factors only

in connection with bona fide wellness

programs. The regulation establishes

four requirements for such bona fide

wellness programs.

The Departments estimate that 36,000

plans with fewer than 100 participants

vary employee premium contributions

or benefit levels across similarly

situated individuals based on health

factors. While this represents just 1

percent of all small plans, the

Departments nonetheless believe that it

represents a substantial number of small

entities. The Departments also note that

at least some premium discounts or

surcharges may be large. Premium

discounts associated with wellness

programs are believed to range as high

as $560 per affected participant per

year. Therefore, the Departments believe

that the impact of this regulation on at

least some small entities may be

significant. Having reached these

conclusions, the Departments carried

out an IRFA as part of their unified

analysis of the costs and benefits of the

regulation. The reasoning and

assumptions underlying the

Departments’ unified analysis of the

regulation’s costs and benefits are

detailed later in this preamble.

The regulation’s first requirement

caps maximum allowable variation in

employee premium contribution and

benefit levels. The Departments estimate

that 9,300 small plans will be affected

by the cap. These plans can comply

with this requirement by reducing

premiums (or increasing benefits) by

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Proposed Rules 1425

$1.1 million on aggregate for those

participants whose premiums are higher

(or whose benefits are lower) due to

health factors. This would constitute an

ongoing, annual transfer of cost of $1.1

million, or $122 on average per affected

plan. The regulation does not limit

small plans’ flexibility to transfer this

cost back evenly to all participants in

the form of small premium increases or

benefit cuts.

The regulation’s second requirement

provides that wellness programs must

be reasonably designed to promote

health or prevent disease. Comments

received by the Departments and

available literature on employee

wellness programs suggest that existing

wellness programs generally satisfy this

requirement. The requirement therefore

is not expected to compel small plans to

modify existing wellness programs. It is

not expected to entail economic costs

nor to prompt transfers.

The third requirement provides that

rewards under wellness programs must

be available to all similarly situated

individuals. In particular, programs

must allow individuals for whom it

would be unreasonably difficult due to

a medical condition to satisfy initial

program standards an opportunity to

satisfy reasonable alternative standards.

The Departments believe that some

small plans’ wellness programs do not

currently satisfy this requirement and

will have to be modified.

The Departments estimate that 21,000

small plans’ wellness programs include

initial standards that may be

unreasonably difficult for some

participants to meet. These plans are

estimated to include 18,000 participants

for whom the standard is in fact

unreasonably difficult to meet. (Many

small plans are very small, having fewer

than 10 participants, and many will

include no participant for whom the

initial standard is unreasonable difficult

to meet for a medical reason.)

Satisfaction of alternative standards by

these participants will result in transfers

of cost as they qualify for discounts or

escape surcharges. If all of these

participants request and then satisfy an

alternative standard, the transfer would

amount to $5 million annually. If onehalf request alternative standards and

one-half of those meet them, the transfer

would amount to $1 million.

In addition to transfers, small plans

will also incur new economic costs to

provide alternative standards. However,

plans can satisfy this requirement by

providing inexpensive alternative

standards, and have the flexibility to

select whatever reasonable alternative

standard is most desirable or cost

efficient. Plans not wishing to provide

alternative standards also have the

option of abolishing health-status based

variation in employee premiums. The

Departments expect that the economic

cost to provide alternatives combined

with the associated transfer cost of

granting discounts or waiving

surcharges will not exceed the transfer

cost associated with granting discounts

or waiving surcharges for all

participants who qualify for an

alternative, estimated here at $1 million

to $5 million, or about $55 to $221 per

affected plan. Plans have the flexibility

to transfer some or all of this cost evenly

to all participants in the form of small

premium increases or benefit cuts.

The fourth requirement provides that

plan materials describing wellness plan

standards must disclose the availability

of reasonable alternative standards. This

requirement will affect the 36,000 small

plans that apply discounts or

surcharges. These plans will incur

economic costs to revise affected plan

materials. The 5,000 to 18,000 small

plan participants who will succeed at

satisfying these alternative standards

will benefit from these disclosures. The

disclosures need not specify what

alternatives are available, and the

regulation provides model language that

can be used to satisfy this requirement.

Legal requirements other than this

regulation generally require plans and

issuers to maintain accurate materials

describing plans. Plans and issuers

generally update such materials on a

regular basis as part of their normal

business practices. This requirement is

expected to represent a negligible

fraction of the ongoing, normal cost of

updating plans’ materials. This analysis

therefore attributes no cost to this

requirement.

Special Analyses—Department of the

Treasury

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in Executive Order 12866. Therefore, a

regulatory assessment is not required. It

also has been determined that this

notice of proposed rulemaking does not

impose a collection of information on

small entities and is not subject to

section 553(b) of the Administrative

Procedure Act (5 U.S.C. chapter 5). For

these reasons, the Regulatory Flexibility

Act (5 U.S.C. chapter 6) does not apply

pursuant to 5 U.S.C. section 603(a),

which exempts from the Act’s

requirements certain rules involving the

internal revenue laws. Pursuant to

section 7805(f) of the Internal Revenue

Code, this notice of proposed

rulemaking will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment

on its impact on small business.

Paperwork Reduction Act

Department of Labor and Department of

the Treasury

This Notice of Proposed Rulemaking

includes a requirement that if the plan

materials describe the standard required

to be met in order to qualify for a reward

such as a premium discount or waiver

of a cost-sharing requirement, they must

also disclose the availability of a

reasonable alternative standard.

However, plan materials are not

required to describe specific reasonable

alternatives. The proposal also includes

examples of disclosures which would

satisfy the requirements of the proposed

rule.

Plan administrators of group health

plans covered under Title I of ERISA are

required to make certain disclosures

about the terms of a plan and material

changes in terms through a Summary

Plan Description or Summary of

Material Modifications pursuant to

sections 101(a) and 102(a) of ERISA.

Group health plans and issuers also

typically make other informational

materials available to participants,

either as a result of state and local

requirements, or as part of their usual

business practices in connection with

the offer and promotion of health care

coverage to employees.

While this proposal may cause group

health plans to modify informational

materials pertaining to wellness

programs, the Departments conclude

that it creates no new information

collection requirements, and that the

overall impact on existing information

collection activities will be negligible.

First, as described earlier, it is estimated

that the proposed reasonable alternative

requirements for bona fide wellness

programs will impact a maximum of

22,000 plans and 229,000 participants.

These numbers are very small in

comparison with the 2.5 million ERISA

group health plans that cover 65 million

participants, and 175,500 state and local

governmental plans that cover 11.5

million participants.

In addition, because model language

is provided in the proposal, these

modifications are expected to require a

minimal amount of effort, such that they

fall within the provision of OMB

regulations in 5 CFR 1320.3(c)(2). This

provision excludes from the definition

of collection of information language

which is supplied by the Federal

government for disclosure purposes.

Finally, the Department of Labor’s

methodology in accounting for the

burden of the Summary Plan

1426 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Proposed Rules

Description (SPD) and Summary of

Material Modifications (SMM), as

currently approved under OMB control

number 1210–0039, incorporates an

assumption concerning a constant rate

of revision in these disclosure materials

which is based on plans’ actual

reporting on the annual report/return

(Form 5500) of their rates of

modification. This occurrence of SPD

revisions is generally more frequent

than the minimum time frames

described in section 104(b) and related

regulations. The annual hour and cost

burdens of the SMM/SPD information

collection request is currently estimated

at 576,000 hours and $97 million.

Because the burden of modifying a

wellness program’s disclosures is

expected to be negligible, and readily

incorporated in other revisions made to

plan materials on an ongoing basis, the

methodology used already accounts for

this type of change. Therefore, the

Department concludes that the

modification described in this proposal

to the information collection request is

neither substantive nor material, and

accordingly it attributes no burden to

this regulation.

Department of Health and Human

Services

Under the Paperwork Reduction Act

of 1995, we are required to provide 60-

day notice in the Federal Register and

solicit public comment before a

collection of information requirement is

submitted to the Office of Management

and Budget (OMB) for review and

approval. In order to fairly evaluate

whether an information collection

should be approved by OMB, section

3506(c)(2)(A) of the Paperwork

Reduction Act of 1995 requires that we

solicit comment on the following issues:

• The need for the information

collection and its usefulness in carrying

out the proper functions of our agency.

• The accuracy of our estimate of the

information collection burden.

• The quality, utility, and clarity of

the information to be collected.

• Recommendations to minimize the

information collection burden on the

affected public, including automated

collection techniques.

Section 146.121 Prohibiting

discrimination against participants and

beneficiaries based on a health factor.

(f) Bona fide wellness programs

Paragraph (1)(iv) requires the plan or

issuer to disclose in all plan materials

describing the terms of the program the

availability of a reasonable alternative

standard required under paragraph

(f)(1)(iii) of this section. However, in

plan materials that merely mention that

a program is available, without

describing its terms, the disclosure is

not required. This requirement will

affect the estimated 1,300 nonfederal

governmental plans that apply premium

discounts or surcharges. The

development of the materials is

expected to take 100 hours for

nonfederal governmental plans. The

corresponding burden performed by

service providers is estimated to be

$38,000.

We have submitted a copy of this rule

to OMB for its review of the information

collection requirements. These

requirements are not effective until they

have been approved by OMB. A notice

will be published in the Federal

Register when approval is obtained.

If you comment on any of these

information collection and record

keeping requirements, please mail

copies directly to the following:

Health Care Financing Administration,

Office of Information Services,

Information Technology Investment

Management Group, Division of

HCFA Enterprise Standards, Room

C2–26–17, 7500 Security Boulevard,

Baltimore, MD 21244–1850, Attn:

John Burke HCFA–2078–P,

and

Office of Information and Regulatory

Affairs, Office of Management and

Budget, Room 10235, New Executive

Office Building, Washington, DC

20503, Attn.: Allison Herron Eydt,

HCFA–2078–P.

Small Business Regulatory Enforcement

Fairness Act

The proposed rule is subject to the

provisions of the Small Business

Regulatory Enforcement Fairness Act of

1996 (5 U.S.C. 801 et seq.) and, if

finalized, will be transmitted to

Congress and the Comptroller General

for review. The rule is not a ‘‘major

rule’’ as that term is defined in 5 U.S.C.

804, because it is not likely to result in

(1) an annual effect on the economy of

$100 million or more; (2) a major

increase in costs or prices for

consumers, individual industries, or

federal, State, or local government

agencies, or geographic regions; or (3)

significant adverse effects on

competition, employment, investment,

productivity, innovation, or on the

ability of United States-based

enterprises to compete with foreignbased enterprises in domestic or export

markets.

Unfunded Mandates Reform Act

For purposes of the Unfunded

Mandates Reform Act of 1995 (Public

Law 104–4), as well as Executive Order

12875, this proposed rule does not

include any Federal mandate that may

result in expenditures by State, local, or

tribal governments, nor does it include

mandates which may impose an annual

burden of $100 million or more on the

private sector.

Federalism Statement—Department of

Labor and Department of Health and

Human Services

Executive Order 13132 (August 4,

1999) outlines fundamental principles

of federalism, and requires the

adherence to specific criteria by federal

agencies in the process of their

formulation and implementation of

policies that have substantial direct

effects on the States, the relationship

between the national government and

States, or on the distribution of power

and responsibilities among the various

levels of government. Agencies

promulgating regulations that have

these federalism implications must

consult with State and local officials,

and describe the extent of their

consultation and the nature of the

concerns of State and local officials in

the preamble to the regulation.

In the Departments’ view, these

proposed regulations do not have

federalism implications, because they

do not have substantial direct effects on

the States, the relationship between the

national government and States, or on

the distribution of power and

responsibilities among various levels of

government. This is largely because,

with respect to health insurance issuers,

the vast majority of States have enacted

laws which meet or exceed the federal

standards in HIPAA prohibiting

discrimination based on health factors.

Therefore, the regulations are not likely

to require substantial additional

oversight of States by the Department of

Health and Human Services.

In general, through section 514,

ERISA supersedes State laws to the

extent that they relate to any covered

employee benefit plan, and preserves

State laws that regulate insurance,

banking, or securities. While ERISA

prohibits States from regulating a plan

as an insurance or investment company

or bank, HIPAA added a new

preemption provision to ERISA (as well

as to the PHS Act) preserving the

applicability of State laws establishing

requirements for issuers of group health

insurance coverage, except to the extent

that these requirements prevent the

application of the portability, access,

and renewability requirements of

HIPAA. The nondiscrimination

provisions that are the subject of this

rulemaking are included among those

requirements.

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Proposed Rules 1427

2This authority applies to insurance issued with

respect to group health plans generally, including

plans covering employees of church organizations.

Thus, this discussion of federalism applies to all

group health insurance coverage that is subject to

the PHS Act, including those church plans that

provide coverage through a health insurance issuer

(but not to church plans that do not provide

coverage through a health insurance issuer). For

additional information relating to the application of

these nondiscrimination rules to church plans, see

the preamble to regulations being proposed

elsewhere in this issue of the Federal Register

regarding section 9802(c) of the Code relating to

church plans.

In enacting these new preemption

provisions, Congress indicated its intent

to establish a preemption of State

insurance requirements only to the

extent that those requirements prevent

the application of the basic protections

set forth in HIPAA. HIPAA’s Conference

Report states that the conferees intended

the narrowest preemption of State laws

with regard to health insurance issuers.

H.R. Conf. Rep. No. 736, 104th Cong. 2d

Session 205 (1996). Consequently,

under the statute and the Conference

Report, State insurance laws that are

more stringent than the federal

requirements are unlikely to ‘‘prevent

the application of’’ the HIPAA

nondiscrimination provisions.

Accordingly, States are given

significant latitude to impose

requirements on health insurance

issuers that are more restrictive than the

federal law. In many cases, the federal

law imposes minimum requirements

which States are free to exceed.

Guidance conveying this interpretation

was published in the Federal Register

on April 8, 1997 and these regulations

do not reduce the discretion given to the

States by the statute. It is the

Departments’ understanding that the

vast majority of States have in fact

implemented provisions which meet or

exceed the minimum requirements of

the HIPAA non-discrimination

provisions.

HIPAA provides that the States may

enforce the provisions of HIPAA as they

pertain to issuers, but that the Secretary

of Health and Human Services must

enforce any provisions that a State fails

to substantially enforce. When

exercising its responsibility to enforce

the provisions of HIPAA, HCFA works

cooperatively with the States for the

purpose of addressing State concerns

and avoiding conflicts with the exercise

of State authority.2 HCFA has developed

procedures to implement its

enforcement responsibilities, and to

afford the States the maximum

opportunity to enforce HIPAA’s

requirements in the first instance.

HCFA’s procedures address the

handling of reports that States may not

be enforcing HIPAA’s requirements, and

the mechanism for allocating

enforcement responsibility between the

States and HCFA. To date, HCFA has

had occasion to enforce the HIPAA nondiscrimination provisions in only two

States.

Although the Departments conclude

that these proposed regulations do not

have federalism implications, in

keeping with the spirit of the Executive

Order that agencies closely examine any

policies that may have federalism

implications or limit the policy making

discretion of the States, the Department

of Labor and HCFA have engaged in

numerous efforts to consult with and

work cooperatively with affected State

and local officials.

For example, the Departments were

aware that some States commented on

the way the federal provisions should be

interpreted. Therefore, the Departments

have sought and received input from

State insurance regulators and the

National Association of Insurance

Commissioners (NAIC). The NAIC is a

non-profit corporation established by

the insurance commissioners of the 50

States, the District of Columbia, and the

four U.S. territories, that among other

things provides a forum for the

development of uniform policy when

uniformity is appropriate. Its members

meet, discuss, and offer solutions to

mutual problems. The NAIC sponsors

quarterly meetings to provide a forum

for the exchange of ideas, and in-depth

consideration of insurance issues by

regulators, industry representatives, and

consumers. HCFA and Department of

Labor staff have attended the quarterly

meetings consistently to listen to the

concerns of the State Insurance

Departments regarding HIPAA issues,

including the nondiscrimination

provisions. In addition to the general

discussions, committee meetings and

task groups, the NAIC sponsors the

following two standing HIPAA meetings

for members during the quarterly

conferences:

• HCFA/DOL Meeting on HIPAA

Issues (This meeting provides HCFA

and Labor the opportunity to provide

updates on regulations, bulletins,

enforcement actions and outreach

efforts regarding HIPAA.)

• The NAIC/HCFA Liaison Meeting

(This meeting provides HCFA and the

NAIC the opportunity to discuss HIPAA

and other health care programs.)

In their comments on the 1997

interim rules, the NAIC suggested that

the permissible standards for

determining bona fide wellness

programs ensure that such programs are

not used as a proxy for discrimination

based on a health factor. The NAIC also

commented that the nondiscrimination

provisions of HIPAA ‘‘are especially

significant in their impact on small

groups, and particularly in small

groups, where there is a great potential

for adverse selection and gaming.’’ One

State asked that the Departments’ final

nondiscrimination provisions be as

consumer-protective as possible.

Finally, another State described alreadyexisting State regulation of issuers

offering wellness programs in that State

and asked that standards for bona fide

wellness programs be left to the States.

The Departments considered these

views very carefully when formulating

the wellness program proposal. While

allowing plans a great deal of flexibility

in determining what kinds of incentives

best encourage the plan’s own

participants and beneficiaries to pursue

a healthier lifestyle, the Departments

proposal ensures that individuals have

an opportunity to qualify for the

premium discount or other reward. If an

individual is unable to satisfy a

wellness program standard due to a

health factor, plans are required to make

a reasonable alternative standard

available to the individual. In addition,

the Departments reiterate their position

that State insurance laws that are more

stringent than the federal requirements

are unlikely to ‘‘prevent the application

of’’ the federal law and therefore are

saved from preemption. Therefore, these

more protective State laws continue to

apply for individuals receiving health

insurance coverage in connection with a

group health plan.

The Departments welcome further

comment on these issues from the States

in response to this proposal.

The Departments also cooperate with

the States in several ongoing outreach

initiatives, through which information

on HIPAA is shared among federal

regulators, State regulators, and the

regulated community. In particular, the

Department of Labor has established a

Health Benefits Education Campaign

with more than 70 partners, including

HCFA, NAIC and many business and

consumer groups. HCFA has sponsored

four conferences with the States—the

Consumer Outreach and Advocacy

conferences in March 1999 and June

2000, the Implementation and

Enforcement of HIPAA National StateFederal Conferences in August 1999 and

2000. Furthermore, both the Department

of Labor and HCFA websites offer links

to important State websites and other

resources, facilitating coordination

between the State and federal regulators

and the regulated community.

In conclusion, throughout the process

of developing these regulations, to the

extent feasible within the specific

preemption provisions of HIPAA, the

1428 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Proposed Rules

Departments have attempted to balance

the States’ interests in regulating health

plans and health insurance issuers, and

the rights of those individuals that

Congress intended to protect through

the enactment of HIPAA.

Unified Analysis of Costs and Benefits—

Department of Labor and Department of

Health and Human Services

Introduction

Under the proposed regulation, health

plans generally may vary employee

premium contributions or benefit levels

across similarly situated individuals

based on health factors only in

connection with bona fide wellness

programs. The regulation establishes

four requirements for such bona fide

wellness programs. A large body of literature, together

with comments received by the

Departments, demonstrate that welldesigned wellness programs can deliver

benefits well in excess of their costs. For

example, the U.S. Centers for Disease

Control and Prevention estimate that

implementing proven clinical smoking

cessation interventions can save one

year of life for each $2,587 invested. In

addition to reduced mortality, benefits

of effective wellness programs can

include reduced absenteeism, improved

productivity, and reduced medical

costs. The requirements contained in

the proposed regulation were crafted to

accommodate and not impair such

beneficial programs, while combating

discrimination in eligibility and

premiums for similarly situated

individuals as intended by Congress.

Detailed Estimates

Estimation of the economic impacts of

the four requirements is difficult

because data on affected plans’ current

practices are incomplete, and because

plans’ approaches to compliance with

the requirements and the effects of those

approaches will vary and cannot be

predicted. Nonetheless, the Departments

undertook to consider the impacts fully

and to develop estimates based on

reasonable assumptions. Based on a 1993 survey of employers

by the Robert Wood Johnson

Foundation, the Departments estimate

that 1.6 percent of large plans and 1.2

percent of small plans currently vary

employee premium contributions across

similarly situated individuals and will

be subject to the four requirements for

bona fide wellness programs. This

amounts to 32,000 plans covering 1.2

million participants. According to an

industry survey by Hewitt Associates,

just more than one-third as many plans

vary benefit levels across similarly

situated individuals as vary premiums.

This amounts to 11,000 plans covering

415,000 participants. The Departments

separately considered the effect of each

of the four requirements on these plans.

For purposes of its estimates, the

Departments assumed that one-half of

the plans in the latter group are also

included in the former, thereby

estimating that 37,000 plans covering

1.4 million participants will be subject

to the four requirements for bona fide

wellness programs.

Limit on Dollar Amount—Under the

first requirement, any discount or

surcharge, whether applicable to

employee premiums or benefit levels,

must not exceed a specified percentage

of the total premium for employee-only

coverage under the plan. The proposed

regulations specify three alternative

percentages: 10, 15, and 20. For

purposes of this discussion, the

Departments examine the midpoint of

the three alternative percentages, 15

percent.

The Departments lack representative

data on the magnitude of the discounts

and surcharges applied by affected

plans today. One leading consultant

practicing in this area believes that

wellness incentive premium discounts

ranged from about $60 to about $480

annually in 1998, averaging about $240

that year. Expressed as a percentage of

average total premium for employeeonly coverage that year, this amounts to

a range of about 3 percent to 23 percent

and an average of about 11 percent. This

suggests that most affected plans,

including some whose discounts are

somewhat larger than average, already

comply with the first requirement and

will not need to reduce the size of the

discounts or surcharges they apply. It

appears likely, however, that a sizeable

minority of plans—perhaps a few

thousand plans covering a few hundred

thousand participants—will need to

reduce the size of their discounts or

surcharges in order to comply with the

first requirement. The table below

summarizes the Departments’

assumptions regarding the size of

discounts and surcharges at year 2000

levels, expressed in annual amounts.

The Departments considered the

potential economic effects of requiring

these plans to reduce the size of their

discounts or surcharges. These effects

are likely to include transfers of costs

among plan sponsors and participants,

as well as new economic costs and

benefits.

Percent Dollars

Single employee total

premium ................ ................ $2,448

Discount or Surcharge:

low ......................... 3 70

average ................. 11 280

high ....................... 23 560

Cap on discount or

surcharge .............. 15 367

Transfers will arise as plans reduce

discounts and surcharges. Plan sponsors

can exercise substantial control over the

size and direction of these transfers.

Limiting the size of discounts and

surcharges restricts only the differential

treatment of participants who satisfy

wellness program standards and those

who do not. It does not, for example,

restrict plans sponsors’ flexibility to

determine the respective employer and

employee shares of base premiums.

Possible outcomes include a transfer of

costs to plan sponsors from participants

who satisfy wellness program standards,

from plan sponsors to participants who

do not satisfy the standards, from

participants who satisfy the standards to

those who do not, or some combination

of these.

The Departments developed a very

rough estimate of the total amount of

transfers that might derive from this

requirement. The Departments’ estimate

assumes that (1) all discounts and

surcharges take the form of employee

premium discounts; (2) discounts are

distributed evenly within both the lowto-average range and the average-to-high

range, and are distributed across these

ranges such that their mean equals the

assumed average; and (3) 70 percent of

participants qualify for the discount.

This implies that just more than onefourth of plans with discounts or

surcharges will be impacted by the cap,

and that these plans’ current discounts

and surcharges exceed the cap by $86

on average. The 9,600 affected plans

could satisfy this requirement by

reducing premiums for the 106,000

participants who do not qualify by $86

annually, for an aggregate, ongoing

annual transfer of approximately $9

million. The Departments solicit

comments on their assumptions and

estimate, and would welcome

information supportive of better

estimates.

New economic costs and benefits may

arise if changes in the size of discounts

or surcharges result in changes in

participant behavior. Net economic welfare might be lost if

some wellness programs’ effectiveness

is eroded, but the magnitude and

incidence of such effects is expected to

be negligible. Consider a wellness

program that discounts premiums for

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Proposed Rules 1429

participants who take part in an exercise

program. It is plausible that, at the

margin, a few participants who would

take part in order to obtain a discount

of between $368 and $560 annually will

not take part to obtain a discount of

$367. This might represent a net loss of

economic welfare. This effect is

expected to be negligible, however.

Based on the assumptions specified

above, just 248,000 participants now

qualifying for discounts would be

affected. Reductions in discounts are

likely to average about $86 annually,

which amounts to $7 per month or $3

per biweekly pay period. Employee

premiums are often deducted from pay

pre-tax, so the after tax value of these

discounts may be even smaller.

Moreover, the proposed regulation caps

only discounts and surcharges applied

to similarly situated individuals in the

context of a group health plans. It does

not restrict plan sponsors from

employing other motivational tools to

encourage participation in wellness

programs. According to the Hewitt

survey, among 408 employers that

offered incentives for participation in

wellness programs, 24 percent offered

awards or gifts and 62 percent varied

life insurance premiums, while just 14

percent varied medical premiums.

On the other hand, net economic

welfare likely will be gained in

instances where large premium

differentials would otherwise have

served to discourage enrollment in

health plans by employees who did not

satisfy wellness program requirements.

Consider a plan that provides a very

large discount for non-smokers. The

very high employee premiums charged

to smokers might discourage some from

enrolling in the plan at all, and some of

these might be uninsured as a result. It

seems unlikely that the plan sponsor

would respond to the first requirement

of the proposed regulation by raising

premiums drastically for all nonsmokers, driving many out of the plan.

Instead, the plan sponsor would reduce

premiums for smokers, and more

smokers would enroll. This would

result in transfers to newly enrolled

smokers from the plan sponsor (and

possibly from non-smokers if the plan

sponsor makes other changes to

compensation). But it would also result

in net gains in economic welfare from

reduced uninsurance.

The Departments believe that the net

economic gains from prohibiting

discounts and surcharges so large that

they could discourage enrollment based

on health factors outweigh any net

losses that might derive from the

negligible reduction of some employees’

incentive to participate in wellness

programs. Comments are solicited on

the magnitude of these and any other

effects and on the attendant costs and

benefits.

Reasonable Design—Under the second

requirement, the program must be

reasonably designed to promote health

or prevent disease. The Departments

believe that a program that is not so

designed would not provide economic

benefits, but would serve merely to

transfer costs from plan sponsors to

targeted individuals based on health

factors. This requirement therefore is

not expected to impose economic costs

but might prompt transfers of costs from

otherwise targeted individuals to their

plans’ sponsors (or to other participants

in their plans if plan sponsors elect to

pass these costs back evenly to all

participants). Comments received by the

Departments and available literature on

employee wellness programs, however,

suggest that existing wellness programs

generally satisfy this requirement. The

requirement therefore is not expected to

compel plans to modify existing

wellness programs. It is not expected to

entail economic costs nor to prompt

transfers. The Departments would

appreciate comments on this conclusion

and information on the types of existing

wellness programs (if any) that would

not satisfy requirement.

Uniform Availability—The third

requirement provides that rewards

under the program must be available to

all similarly situated individuals. In

particular, the program must allow any

individual for whom it would be

unreasonably difficult due to a medical

condition to satisfy the initial program

standard an opportunity to satisfy a

reasonable alternative standard.

Comments received by the Departments

and available literature on employee

wellness programs suggest that some

wellness programs do not currently

satisfy this requirement and will have to

be modified. Based on the Hewitt

survey, the Departments estimate that

among employers that provide

incentives for employees to participate

in wellness programs, 18 percent

require employees to achieve a low risk

behavior to qualify for the incentive, 79

percent require a pledge of compliance,

and 38 percent require participation in

a program. (These numbers sum to more

than 100 percent because wellness

programs may apply more than one

criterion.) Depending on the nature of

the wellness program, it might be

unreasonably difficult due to a medical

condition for at least some plan

participants to achieve the behavior or

to comply with or participate in the

program.

The Departments identified three

broad types of economic impact that

might arise from the third requirement.

First, affected plans will incur some

economic cost to make available

reasonable alternative standards.

Second, additional economic costs and

benefits may arise depending on the

nature of alternatives provided,

individuals’ use of these alternatives,

and any changes in the affected

individuals’ behavioral and health

outcomes. Third, some costs may be

transferred from individuals who would

fail to satisfy programs’ initial

standards, but who will satisfy

reasonable alternative standards once

available (and thereby qualify for

associated discounts), to plan sponsors

(or to other participants in their plans if

plan sponsors elect to pass these costs

back evenly to all participants).

The Departments note that some plans

that apply different discounts or

surcharges to similarly situated

individuals and are therefore subject to

the requirement may not need to

provide alternative standards. The

requirement provides that alternative

standards need not be specified or

provided until a participant for whom it

is unreasonably difficult due to a

medical condition to satisfy the initial

standard seeks such an alternative.

Some wellness programs’ initial

standards may be such that no

participant would ever find them

unreasonably difficult to satisfy due to

a medical condition. The Departments

reviewed Hewitt survey data on

wellness program standards and criteria.

Based on their review they estimate that

20,000 of the 35,000 potentially affected

plans have initial wellness program

standards that might be unreasonably

difficult for some participants to satisfy

due to a medical condition. Moreover,

because alternatives need not be made

available until they are sought by

qualified plan participants, it might be

possible for some of these plans to go for

years or even indefinitely without

needing to make available an alternative

standard. This could be particularly

likely for small plans. The most

common standards for wellness

programs pertain to smoking, blood

pressure, and cholesterol levels,

according to the Hewitt Survey. Based

on U.S. Centers for Disease Control and

Management data on the incidence of

certain health habits and conditions in

the general population, the Departments

estimate that among companies with 5

employees, about one-fourth probably

employ no smokers, and about one-third

probably employ no one with high

blood pressure or cholesterol.

1430 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Proposed Rules

3Average level based on the Kaiser Family

Foundation/Health Research and Education Trust

Survey of Employer-Sponsored Health benefits,

1999, projected by the Departments to 2000 levels.

Approximately 96 percent of all plans

with potentially difficult initial

wellness program standards have fewer

than 100 participants.

How many participants might qualify

for, seek, and ultimately satisfy

alternative standards? The Departments

lack sufficient data to estimate these

counts with confidence. Rough

estimates were developed as follows.

The Departments examined the Hewitt

survey of wellness program provisions

and U.S. Centers for Disease Control and

Prevention statistics on the incidence of

certain health habits and conditions in

the general population in order to

discern how wellness programs’ initial

standards might interact with plan

participants’ health habits and health

status. Based on these data, it appears

that as many as 29 percent of

participants in plans with discounts or

surcharges, or 394,000 individuals,

might fail to satisfy wellness programs’

initial standards. Of these,

approximately 229,000 are in the 22,000

plans which apply standards that might

be unreasonably difficult due to a

medical condition for some plan

participants to satisfy, the Departments

estimate. The standards would in fact be

unreasonably difficult to satisfy for

some subset of these individuals—

148,000 by the Departments’ estimate.

The Departments lack any basis to

estimate how many of these will avail

themselves of an alternative standard, or

how many that do will succeed in

satisfying that standard. To estimate the

potential impact of this requirement, the

Departments considered two

assumptions: an upper bound

assumption under which all 148,000

individuals seek and satisfy alternative

standards, and an alternative

assumption under which one-half (or

74,000) seek an alternative and one-half

of those (37,000) satisfy it.

Where plans are required to make

available reasonable alternative

standards, what direct costs will they

incur? The regulation does not prescribe

a particular type of alternative standard

that must be provided. Instead, it

permits plan sponsors flexibility to

provide any reasonable alternative. The

Departments expect that plans sponsors

will select alternatives that entail the

minimum net costs (or, stated

differently, the maximum net benefits)

that are possible. Plan sponsors may

select low-cost alternatives, such as

requiring an individual for whom it

would be unreasonably difficult to quit

smoking (and thereby qualify for a nonsmoker discount) to attend a smoking

cessation program that is available at

little or no cost in the community, or to

watch educational videos or review

educational literature. Plan sponsors

presumably will select higher-cost

alternatives only if they thereby derive

offsetting benefits, such as a higher

smoking cessation success rate. The

Departments also note that the number

of plans with initial wellness program

standards that might be unreasonably

difficult for some participants to satisfy

is probably small (having been

estimated at 22,000, or 1 percent of all

plans), as is the number of individuals

who would take advantage of alternative

standards (estimated at between 74,000

and 148,00, or between 0.1 percent and

0.2 percent of all participants).

It seems reasonable to presume that

the net cost plan sponsors will incur in

the provision of alternatives, including

transfers as well as new economic costs

and benefits, will not exceed the

transfer cost of providing discounts (or

waiving surcharges) for all plan

participants who qualify for

alternatives, which is estimated below

at between $9 million and $37 million.

It is likely that many plan sponsors will

find more cost effective ways to satisfy

this requirement, and that the true net

cost to them will therefore be much

smaller than this. The Departments have

no basis for estimating the magnitude of

the cost of providing alternative

standards or of potential offsetting

benefits, however, and therefore solicit

comments from the public on this

question.

What other economic costs and

benefits might arise where alternative

standards are made available? A large

number of outcomes are possible.

Consider a program that provides

premium discounts for non-smokers.

It is possible that some individuals

who would have quit smoking in order

to qualify for a discount will

nonetheless find it unreasonably

difficult to quit and will obtain the

discount while continuing to smoke by

satisfying an alternative standard. This

would represent a net loss of economic

welfare from increased smoking.

On the other hand, consider

individuals who, in the context of the

initial program, are unable or unwilling

to quit smoking. It seems likely that

some of these individuals could quit

with appropriate assistance, and that

some alternative standards provided by

plan sponsors will provide such

assistance. In such cases, a program

which had the effect of shifting

premium costs to smokers would be

transformed into one that successfully

reduced smoking. This would represent

a net gain of economic welfare.

Which scenario is more likely? The

Departments have no concrete basis for

answering this question, and therefore

solicit comments on it. However, the

Departments note that plan sponsors

will have strong motivation to identify

and provide alternative standards that

have positive net economic effects. They

will be disinclined to provide

alternatives that undermine their overall

wellness program and worsen

behavioral and health outcomes, or that

make financial rewards available absent

meaningful efforts by participants to

improve their health habits and health.

Instead they will be inclined to provide

alternatives that sustain or reinforce

plan participants’ incentive to improve

their health habits and health, and/or

that help participants make such

improvements. It therefore seems likely

that gains in economic welfare from this

requirement will equal or outweigh

losses. The Departments anticipate that

the requirement to provide reasonable

alternative standards will reduce

instances where wellness programs

serve only to shift costs to higher risk

individuals and increase instances

where programs succeed at helping high

risk individuals improve their health

habits and health.

What transfers of costs might derive

from the availability of (and

participants’ satisfaction of) alternative

standards? The transfers arising from

this requirement may take the form of

transfers to participants who satisfy new

alternative wellness program standards

from plan sponsors, to such participants

from other participants, or some

combination of these. The Departments

estimated potential transfers as follows.

Assuming average annual total

premiums for employee-only coverage

of $2,448,3 the maximum allowable

discount of 15 percent amounts to $367

per year. As noted earlier, discounts

under existing wellness programs

appear to average about 11 percent (or

$280 per year for a plan costing $2,448),

ranging from 3 percent ($70) to 23

percent ($560). Reducing all discounts

greater than $367 per year to that

amount will reduce the average, perhaps

to about $251. Assuming that the 37,000

to 148,000 participants who satisfy

alternative standards would not have

satisfied the wellness programs’ initial

standards, the transfers attributable to

their discounts and hence to this

requirement would amount to between

$9 million and $37 million. The

Departments solicit comments on their

assumptions and estimates regarding

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Proposed Rules 1431

transfers that may derive from this

requirement.

Disclosure of Alternatives’

Availability—The fourth requirement

provides that plan materials describing

wellness plan standards must disclose

the availability of reasonable alternative

standards. This requirement will affect

the 37,000 plans that apply discounts or

surcharges. These plans will incur

economic costs to revise affected plan

materials. The 37,000 to 148,000

participants who will succeed at

satisfying these alternative standards

will benefit from these disclosures. The

disclosures need not specify what

alternatives are available, and the

regulation provides model language that

can be used to satisfy this requirement.

The Departments generally account

elsewhere for plans’ cost of updating

such materials to reflect changes in plan

provisions as required under various

disclosure requirements and as is part of

usual business practice. This particular

requirement is expected to represent a

negligible fraction of the ongoing cost of

updating plans’ materials, and is not

separately accounted for here.

List of Subjects

26 CFR Part 54

Excise taxes, Health care, Health

insurance, Pensions, Reporting and

recordkeeping requirements.

29 CFR Part 2590

Employee benefit plans, Employee

Retirement Income Security Act, Health

care, Health insurance, Reporting and

recordkeeping requirements.

45 CFR Part 146

Health care, Health insurance,

Reporting and recordkeeping

requirements, and State regulation of

health insurance.

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 54 is

proposed to be amended as follows:

PART 54—PENSION EXCISE TAXES

Paragraph 1. The authority citation

for part 54 continues to read in part as

follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 54.9802–1 is amended

by adding text to paragraph (b) to read

as follows:

§ 54.9802–1 Prohibiting discrimination

against participants and beneficiaries

based on a health factor.

* * * * *

(f) Bona fide wellness programs—(1)

Definition. A wellness program is a bona

fide wellness program if it satisfies the

requirements of paragraphs (f)(1)(i)

through (f)(1)(iv) of this section.

However, a wellness program providing

a reward that is not contingent on

satisfying a standard related to a health

factor does not violate this section even

if it does not satisfy the requirements of

this paragraph (f) for a bona fide

wellness program.

(i) 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 (10/15/20) percent of the

cost of employee-only coverage under

the plan. For this purpose, the cost of

employee-only coverage is determined

based on the total amount of employer

and employee contributions for the

benefit package under which the

employee is receiving coverage. A

reward can be in the form of a discount,

a rebate of a premium or contribution,

or a waiver of all or part of a costsharing mechanism (such as

deductibles, copayments, or

coinsurance), or the absence of a

surcharge.

(ii) The program must be reasonably

designed to promote good health or

prevent disease. For this purpose, a

program is not reasonably designed to

promote good health or prevent disease

unless the program gives individuals

eligible for the program the opportunity

to qualify for the reward under the

program at least once per year.

(iii) The reward under the program

must be available to all similarly

situated individuals. A reward is not

available to all similarly situated

individuals for a period unless the

program allows—

(A) A reasonable alternative standard

to obtain the reward to any individual

for whom, for that period, it is

unreasonably difficult due to a medical

condition to satisfy the otherwise

applicable standard for the reward; and

(B) A reasonable alternative standard

to obtain the reward to any individual

for whom, for that period, it is

medically inadvisable to attempt to

satisfy the otherwise applicable

standard for the reward.

(iv) The plan must disclose in all plan

materials describing the terms of the

program the availability of a reasonable

alternative standard required under

paragraph (f)(1)(iii) of this section.

(However, in plan materials that merely

mention that a program is available,

without describing its terms, this

disclosure is not required.) The

following language, or substantially

similar language, can be used to satisfy

this requirement: ‘‘If it is unreasonably

difficult due to a medical condition for

you to achieve the standards for the

reward under this program, or if it is

medically inadvisable for you to attempt

to achieve the standards for the reward

under this program, call us at [insert

telephone number] and we will work

with you to develop another way to

qualify for the reward.’’ In addition,

other examples of language that would

satisfy this requirement are set forth in

Examples 4, 5, and 6 of paragraph (f)(2)

of this section.

(2) Examples. The rules of this

paragraph (f) are illustrated by the

following examples:

Example 1. (i) Facts. A group health plan

offers a wellness program to participants and

beneficiaries under which the plan provides

memberships to a local fitness center at a

discount.

(ii) Conclusion. In this Example 1, the

reward under the program is not contingent

on satisfying any standard that is related to

a health factor. Therefore, there is no

discrimination based on a health factor under

either paragraph (b) or (c) of this section and

the requirements for a bona fide wellness

program do not apply.

Example 2. (i) Facts. An employer sponsors

a group health plan. The annual premium for

employee-only coverage is $2,400 (of which

the employer pays $1,800 per year and the

employee pays $600 per year). The plan

implements a wellness program that offers a

$240 rebate on premiums to program

enrollees.

(ii) Conclusion. In this Example 2, the

program satisfies the requirements of

paragraph (f)(1)(i) of this section because the

reward for the wellness program, $240, does

not exceed [10/15/20] percent of the total

annual cost of employee-only coverage,

[$240/$360/$480]. ($2,400 x [10/15/20]% =

[$240/$360/$480].)

Example 3. (i) Facts. A group health plan

gives an annual premium discount of [10/15/

20] percent of the cost of employee-only

coverage to participants who adhere to a

wellness program. The wellness program

consists solely of giving an annual

cholesterol test to participants. Those

participants who achieve a count under 200

receive the premium discount for the year.

(ii) Conclusion. In this Example 3, the

program is not a bona fide wellness program.

The program fails to satisfy the requirement

of being available to all similarly situated

individuals because some participants may

be unable to achieve a cholesterol count of

under 200 and the plan does not make

available a reasonable alternative standard

for obtaining the premium discount. (In

addition, plan materials describing the

program are required to disclose the

availability of the reasonable alternative

standard for obtaining the premium

discount.) Thus, the premium discount

violates paragraph (c) of this section because

it may require an individual to pay a higher

premium based on a health factor of the

individual than is required of a similarly

situated individual under the plan.

Example 4. (i) Facts. Same facts as

Example 3, except that if it is unreasonably

1432 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Proposed Rules

difficult due to a medical condition for a

participant to achieve the targeted cholesterol

count (or if it is medically inadvisable for a

participant to attempt to achieve the targeted

cholesterol count), the plan will make

available a reasonable alternative standard

that takes the relevant medical condition into

account. In addition, all plan materials

describing the terms of the program include

the following statement: ‘‘If it is

unreasonably difficult due to a medical

condition for you to achieve a cholesterol

count under 200, or if it is medically

inadvisable for you to attempt to achieve a

count under 200, call us at the number below

and we will work with you to develop

another way to get the discount.’’ Individual

D is unable to achieve a cholesterol count

under 200. The plan accommodates D by

making the discount available to D, but only

if D complies with a low-cholesterol diet.

(ii) Conclusion. In this Example 5, the

program is a bona fide wellness program

because it satisfies the four requirements of

this paragraph (f). First, the program

complies with the limits on rewards under a

program. Second, it is reasonably designed to

promote good health or prevent disease.

Third, the reward under the program is

available to all similarly situated individuals

because it accommodates individuals for

whom it is unreasonably difficult due to a

medical condition to achieve the targeted

count (or for whom it is medically

inadvisable to attempt to achieve the targeted

count) in the prescribed period by providing

a reasonable alternative standard. Fourth, the

plan discloses in all materials describing the

terms of the program the availability of a

reasonable alternative standard. Thus, the

premium discount does not violate this

section.

Example 5. (i) Facts. A group health plan

will waive the $250 annual deductible

(which is less than [10/15/20] percent of the

annual cost of employee-only coverage under

the plan) for the following year for

participants who have a body mass index

between 19 and 26, determined shortly

before the beginning of the year. However,

any participant for whom it is unreasonably

difficult due to a medical condition to attain

this standard (and any participant for whom

it is medically inadvisable to attempt to

achieve this standard) during the plan year

is given the same discount if the participant

walks for 20 minutes three days a week. Any

participant for whom it is unreasonably

difficult due to a medical condition to attain

either standard (and any participant for

whom it is medically inadvisable to attempt

to achieve either standard during the year) is

given the same discount if the individual

satisfies a reasonable alternative standard

that is tailored to the individual’s situation.

All plan materials describing the terms of the

wellness program include the following

statement: ‘‘If it is unreasonably difficult due

to a medical condition for you to achieve a

body mass index between 19 and 26 (or if it

is medically inadvisable for you to attempt to

achieve this body mass index) this year, your

deductible will be waived if you walk for 20

minutes three days a week. If you cannot

follow the walking program, call us at the

number above and we will work with you to

develop another way to have your deductible

waived, such as a dietary regimen.’’

(ii) Conclusion. In this Example 5, the

program is a bona fide wellness program

because it satisfies the four requirements of

this paragraph (f). First, the program

complies with the limits on rewards under a

program. Second, it is reasonably designed to

promote good health or prevent disease.

Third, the reward under the program is

available to all similarly situated individuals

because it generally accommodates

individuals for whom it is unreasonably

difficult due to a medical condition to

achieve (or for whom it is medically

inadvisable to attempt to achieve) the

targeted body mass index by providing a

reasonable alternative standard (walking) and

it accommodates individuals for whom it is

unreasonably difficult due to a medical

condition (or for whom it is medically

inadvisable to attempt) to walk by providing

an alternative standard that is reasonable for

the individual. Fourth, the plan discloses in

all materials describing the terms of the

program the availability of a reasonable

alternative standard for every individual.

Thus, the waiver of the deductible does not

violate this section.

Example 6. (i) Facts. In conjunction with

an annual open enrollment period, a group

health plan provides a form for participants

to certify that they have not used tobacco

products in the preceding twelve months.

Participants who do not provide the

certification are assessed a surcharge that is

[10/15/20] percent of the cost of employeeonly coverage. However, all plan materials

describing the terms of the wellness program

include the following statement: ‘‘If it is

unreasonably difficult due to a medical

condition for you to meet the requirements

under this program (or if it is medically

inadvisable for you to attempt to meet the

requirements of this program), we will make

available a reasonable alternative standard

for you to avoid this surcharge.’’ It is

unreasonably difficult for Individual E to

stop smoking cigarettes due to an addiction

to nicotine (a medical condition). The plan

accommodates E by requiring E to participate

in a smoking cessation program to avoid the

surcharge. E can avoid the surcharge for as

long as E participates in the program,

regardless of whether E stops smoking (as

long as E continues to be addicted to

nicotine).

(ii) Conclusion. In this Example 6, the

premium surcharge is permissible as a bona

fide wellness program because it satisfies the

four requirements of this paragraph (f). First,

the program complies with the limits on

rewards under a program. Second, it is

reasonably designed to promote good health

or prevent disease. Third, the reward under

the program is available to all similarly

situated individuals because it

accommodates individuals for whom it is

unreasonably difficult due to a medical

condition (or for whom it is medically

inadvisable to attempt) to quit using tobacco

products by providing a reasonable

alternative standard. Fourth, the plan

discloses in all materials describing the terms

of the program the availability of a reasonable

alternative standard. Thus, the premium

surcharge does not violate this section.

* * * * *

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

For the reasons set forth above, 29

CFR Part 2590 is proposed to be

amended as follows:

PART 2590 [AMENDED]—RULES AND

REGULATIONS FOR HEALTH

INSURANCE PORTABILITY AND

RENEWABILITY FOR GROUP HEALTH

PLANS

1. The authority citation for Part 2590

continues to read as follows:

Authority: Secs. 107, 209, 505, 701–703,

711–713, and 731–734 of ERISA (29 U.S.C.

1027, 1059, 1135, 1171–1173, 1181–1183,

and 1191–1194), as amended by HIPAA

(Public Law 104–191, 110 Stat. 1936), MHPA

and NMHPA (Public Law 104–204, 110 Stat.

2935), and WHCRA (Public Law 105–277,

112 Stat. 2681–436), section 101(g)(4) of

HIPAA, and Secretary of Labor’s Order No.

1–87, 52 FR 13139, April 21, 1987.

2. Section 2590.702 is proposed to be

amended by adding text to paragraph (b)

to read as follows:

§ 2590.702 Prohibiting discrimination

against participants and beneficiaries

based on a health factor.

* * * * *

(f) Bona fide wellness programs—(1)

Definition. A wellness program is a bona

fide wellness program if it satisfies the

requirements of paragraphs (f)(1)(i)

through (f)(1)(iv) of this section.

However, a wellness program providing

a reward that is not contingent on

satisfying a standard related to a health

factor does not violate this section even

if it does not satisfy the requirements of

this paragraph (f) for a bona fide

wellness program.

(i) 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 [10/15/20] percent of the

cost of employee-only coverage under

the plan. For this purpose, the cost of

employee-only coverage is determined

based on the total amount of employer

and employee contributions for the

benefit package under which the

employee is receiving coverage. A

reward can be in the form of a discount,

a rebate of a premium or contribution,

or a waiver of all or part of a costsharing mechanism (such as

deductibles, copayments, or

coinsurance), or the absence of a

surcharge.

(ii) The program must be reasonably

designed to promote good health or

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Proposed Rules 1433

prevent disease. For this purpose, a

program is not reasonably designed to

promote good health or prevent disease

unless the program gives individuals

eligible for the program the opportunity

to qualify for the reward under the

program at least once per year.

(iii) The reward under the program

must be available to all similarly

situated individuals. A reward is not

available to all similarly situated

individuals for a period unless the

program allows—

(A) A reasonable alternative standard

to obtain the reward to any individual

for whom, for that period, it is

unreasonably difficult due to a medical

condition to satisfy the otherwise

applicable standard for the reward; and

(B) A reasonable alternative standard

to obtain the reward to any individual

for whom, for that period, it is

medically inadvisable to attempt to

satisfy the otherwise applicable

standard for the reward.

(iv) The plan or issuer must disclose

in all plan materials describing the

terms of the program the availability of

a reasonable alternative standard

required under paragraph (f)(1)(iii) of

this section. (However, in plan materials

that merely mention that a program is

available, without describing its terms,

this disclosure is not required.) The

following language, or substantially

similar language, can be used to satisfy

this requirement: ‘‘If it is unreasonably

difficult due to a medical condition for

you to achieve the standards for the

reward under this program, or if it is

medically inadvisable for you to attempt

to achieve the standards for the reward

under this program, call us at [insert

telephone number] and we will work

with you to develop another way to

qualify for the reward.’’ In addition,

other examples of language that would

satisfy this requirement are set forth in

Examples 4, 5, and 6 of paragraph (f)(2)

of this section.

(2) Examples. The rules of this

paragraph (f) are illustrated by the

following examples:

Example 1. (i) Facts. A group health plan

offers a wellness program to participants and

beneficiaries under which the plan provides

memberships to a local fitness center at a

discount.

(ii) Conclusion. In this Example 1, the

reward under the program is not contingent

on satisfying any standard that is related to

a health factor. Therefore, there is no

discrimination based on a health factor under

either paragraph (b) or (c) of this section and

the requirements for a bona fide wellness

program do not apply.

Example 2. (i) Facts. An employer sponsors

a group health plan. The annual premium for

employee-only coverage is $2,400 (of which

the employer pays $1,800 per year and the

employee pays $600 per year). The plan

implements a wellness program that offers a

$240 rebate on premiums to program

enrollees.

(ii) Conclusion. In this Example 2, the

program satisfies the requirements of

paragraph (f)(1)(i) of this section because the

reward for the wellness program, $240, does

not exceed [10/15/20] percent of the total

annual cost of employee-only coverage,

[$240/$360/$480]. ($2,400 x [10/15/20]% =

[$240/$360/$480].)

Example 3. (i) Facts. A group health plan

gives an annual premium discount of [10/15/

20] percent of the cost of employee-only

coverage to participants who adhere to a

wellness program. The wellness program

consists solely of giving an annual

cholesterol test to participants. Those

participants who achieve a count under 200

receive the premium discount for the year.

(ii) Conclusion. In this Example 3, the

program is not a bona fide wellness program.

The program fails to satisfy the requirement

of being available to all similarly situated

individuals because some participants may

be unable to achieve a cholesterol count of

under 200 and the plan does not make

available a reasonable alternative standard

for obtaining the premium discount. (In

addition, plan materials describing the

program are required to disclose the

availability of the reasonable alternative

standard for obtaining the premium

discount.) Thus, the premium discount

violates paragraph (c) of this section because

it may require an individual to pay a higher

premium based on a health factor of the

individual than is required of a similarly

situated individual under the plan.

Example 4. (i) Facts. Same facts as

Example 3, except that if it is unreasonably

difficult due to a medical condition for a

participant to achieve the targeted cholesterol

count (or if it is medically inadvisable for a

participant to attempt to achieve the targeted

cholesterol count), the plan will make

available a reasonable alternative standard

that takes the relevant medical condition into

account. In addition, all plan materials

describing the terms of the program include

the following statement: ‘‘If it is

unreasonably difficult due to a medical

condition for you to achieve a cholesterol

count under 200, or if it is medically

inadvisable for you to attempt to achieve a

count under 200, call us at the number below

and we will work with you to develop

another way to get the discount.’’ Individual

D is unable to achieve a cholesterol count

under 200. The plan accommodates D by

making the discount available to D, but only

if D complies with a low-cholesterol diet.

(ii) Conclusion. In this Example 4, the

program is a bona fide wellness program

because it satisfies the four requirements of

this paragraph (f). First, the program

complies with the limits on rewards under a

program. Second, it is reasonably designed to

promote good health or prevent disease.

Third, the reward under the program is

available to all similarly situated individuals

because it accommodates individuals for

whom it is unreasonably difficult due to a

medical condition to achieve the targeted

count (or for whom it is medically

inadvisable to attempt to achieve the targeted

count) in the prescribed period by providing

a reasonable alternative standard. Fourth, the

plan discloses in all materials describing the

terms of the program the availability of a

reasonable alternative standard. Thus, the

premium discount does not violate this

section.

Example 5. (i) Facts. A group health plan

will waive the $250 annual deductible

(which is less than [10/15/20] percent of the

annual cost of employee-only coverage under

the plan) for the following year for

participants who have a body mass index

between 19 and 26, determined shortly

before the beginning of the year. However,

any participant for whom it is unreasonably

difficult due to a medical condition to attain

this standard (and any participant for whom

it is medically inadvisable to attempt to

achieve this standard) during the plan year

is given the same discount if the participant

walks for 20 minutes three days a week. Any

participant for whom it is unreasonably

difficult due to a medical condition to attain

either standard (and any participant for

whom it is medically inadvisable to attempt

to achieve either standard during the year) is

given the same discount if the individual

satisfies a reasonable alternative standard

that is tailored to the individual’s situation.

All plan materials describing the terms of the

wellness program include the following

statement: ‘‘If it is unreasonably difficult due

to a medical condition for you to achieve a

body mass index between 19 and 26 (or if it

is medically inadvisable for you to attempt to

achieve this body mass index) this year, your

deductible will be waived if you walk for 20

minutes three days a week. If you cannot

follow the walking program, call us at the

number above and we will work with you to

develop another way to have your deductible

waived, such as a dietary regimen.’’

(ii) Conclusion. In this Example 5, the

program is a bona fide wellness program

because it satisfies the four requirements of

this paragraph (f). First, the program

complies with the limits on rewards under a

program. Second, it is reasonably designed to

promote good health or prevent disease.

Third, the reward under the program is

available to all similarly situated individuals

because it generally accommodates

individuals for whom it is unreasonably

difficult due to a medical condition to

achieve (or for whom it is medically

inadvisable to attempt to achieve) the

targeted body mass index by providing a

reasonable alternative standard (walking) and

it accommodates individuals for whom it is

unreasonably difficult due to a medical

condition (or for whom it is medically

inadvisable to attempt) to walk by providing

an alternative standard that is reasonable for

the individual. Fourth, the plan discloses in

all materials describing the terms of the

program the availability of a reasonable

alternative standard for every individual.

Thus, the waiver of the deductible does not

violate this section.

Example 6. (i) Facts. In conjunction with

an annual open enrollment period, a group

health plan provides a form for participants

to certify that they have not used tobacco

products in the preceding twelve months.

1434 Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Proposed Rules

Participants who do not provide the

certification are assessed a surcharge that is

[10/15/20] percent of the cost of employeeonly coverage. However, all plan materials

describing the terms of the wellness program

include the following statement: ‘‘If it is

unreasonably difficult due to a health factor

for you to meet the requirements under this

program (or if it is medically inadvisable for

you to attempt to meet the requirements of

this program), we will make available a

reasonable alternative standard for you to

avoid this surcharge.’’ It is unreasonably

difficult for Individual E to stop smoking

cigarettes due to an addiction to nicotine (a

medical condition). The plan accommodates

E by requiring E to participate in a smoking

cessation program to avoid the surcharge. E

can avoid the surcharge for as long as E

participates in the program, regardless of

whether E stops smoking (as long as E

continues to be addicted to nicotine).

(ii) Conclusion. In this Example 6, the

premium surcharge is permissible as a bona

fide wellness program because it satisfies the

four requirements of this paragraph (f). First,

the program complies with the limits on

rewards under a program. Second, it is

reasonably designed to promote good health

or prevent disease. Third, the reward under

the program is available to all similarly

situated individuals because it

accommodates individuals for whom it is

unreasonably difficult due to a medical

condition (or for whom it is medically

inadvisable to attempt) to quit using tobacco

products by providing a reasonable

alternative standard. Fourth, the plan

discloses in all materials describing the terms

of the program the availability of a reasonable

alternative standard. Thus, the premium

surcharge does not violate this section.

* * * * *

Signed at Washington, DC this 28th day of

December, 2000.

Leslie B. Kramerich,

Assistant Secretary, Pension and Welfare

Benefits Administration, U.S. Department of

Labor.

For the reasons set forth above, we

propose to amend 45 CFR Part 146 as

follows:

PART 146 [AMENDED]—RULES AND

REGULATIONS FOR HEALTH

INSURANCE PORTABILITY AND

RENEWABILITY FOR GROUP HEALTH

PLANS

1. The authority citation for Part 146

continues to read as follows:

Authority: Secs. 2701 through 2763, 2791

and 2792 of the Public Health Service Act,

42 U.S.C. 300gg through 300gg–63, 300gg–91,

300gg–92 as amended by HIPAA (Public Law

104–191, 110 Stat. 1936), MHPA and

NMHPA (Public Law 104–204, 110 Stat.

2935), and WHCRA (Public Law 105–277,

112 Stat. 2681–436), and section 102(c)(4) of

HIPAA.

2. We propose to amend § 146.121 by

adding text to paragraph (b) to read as

follows:

§ 146.121 Prohibiting discrimination

against participants and beneficiaries

based on a health factor.

* * * * *

(f) Bona fide wellness programs—(1)

Definition. A wellness program is a bona

fide wellness program if it satisfies the

requirements of paragraphs (f)(1)(i)

through (f)(1)(iv) of this section.

However, a wellness program providing

a reward that is not contingent on

satisfying a standard related to a health

factor does not violate this section even

if it does not satisfy the requirements of

this paragraph (f) for a bona fide

wellness program.

(i) 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 [10/15/20] percent of the

cost of employee-only coverage under

the plan. For this purpose, the cost of

employee-only coverage is determined

based on the total amount of employer

and employee contributions for the

benefit package under which the

employee is receiving coverage. A

reward can be in the form of a discount,

a rebate of a premium or contribution,

or a waiver of all or part of a costsharing mechanism (such as

deductibles, copayments, or

coinsurance), or the absence of a

surcharge.

(ii) The program must be reasonably

designed to promote good health or

prevent disease. For this purpose, a

program is not reasonably designed to

promote good health or prevent disease

unless the program gives individuals

eligible for the program the opportunity

to qualify for the reward under the

program at least once per year.

(iii) The reward under the program

must be available to all similarly

situated individuals. A reward is not

available to all similarly situated

individuals for a period unless the

program allows—

(A) A reasonable alternative standard

to obtain the reward to any individual

for whom, for that period, it is

unreasonably difficult due to a medical

condition to satisfy the otherwise

applicable standard for the reward; and

(B) A reasonable alternative standard to

obtain the reward to any individual for

whom, for that period, it is medically

inadvisable to attempt to satisfy the

otherwise applicable standard for the

reward.

(iv) The plan or issuer must disclose

in all plan materials describing the

terms of the program the availability of

a reasonable alternative standard

required under paragraph (f)(1)(iii) of

this section. (However, in plan materials

that merely mention that a program is

available, without describing its terms,

this disclosure is not required.) The

following language, or substantially

similar language, can be used to satisfy

this requirement: ‘‘If it is unreasonably

difficult due to a medical condition for

you to achieve the standards for the

reward under this program, or if it is

medically inadvisable for you to attempt

to achieve the standards for the reward

under this program, call us at [insert

telephone number] and we will work

with you to develop another way to

qualify for the reward.’’ In addition,

other examples of language that would

satisfy this requirement are set forth in

Examples 4, 5, and 6 of paragraph (f)(2)

of this section.

(2) Examples. The rules of this

paragraph (f) are illustrated by the

following examples:

Example 1. (i) Facts. A group health plan

offers a wellness program to participants and

beneficiaries under which the plan provides

memberships to a local fitness center at a

discount.

(ii) Conclusion. In this Example 1, the

reward under the program is not contingent

on satisfying any standard that is related to

a health factor. Therefore, there is no

discrimination based on a health factor under

either paragraph (b) or (c) of this section and

the requirements for a bona fide wellness

program do not apply.

Example 2. (i) Facts. An employer

sponsors a group health plan. The annual

premium for employee-only coverage is

$2,400 (of which the employer pays $1,800

per year and the employee pays $600 per

year). The plan implements a wellness

program that offers a $240 rebate on

premiums to program enrollees.

(ii) Conclusion. In this Example 2, the

program satisfies the requirements of

paragraph (f)(1)(i) of this section because the

reward for the wellness program, $240, does

not exceed [10/15/20] percent of the total

annual cost of employee-only coverage,

[$240/$360/$480]. ($2,400 x [10/15/20]% =

[$240/$360/$480].)

Example 3. (i) Facts. A group health plan

gives an annual premium discount of [10/15/

20] percent of the cost of employee-only

coverage to participants who adhere to a

wellness program. The wellness program

consists solely of giving an annual

cholesterol test to participants. Those

participants who achieve a count under 200

receive the premium discount for the year.

(ii) Conclusion. In this Example 3, the

program is not a bona fide wellness program.

The program fails to satisfy the requirement

of being available to all similarly situated

individuals because some participants may

be unable to achieve a cholesterol count of

under 200 and the plan does not make

available a reasonable alternative standard

for obtaining the premium discount. (In

addition, plan materials describing the

program are required to disclose the

availability of the reasonable alternative

standard for obtaining the premium

Federal Register / Vol. 66, No. 5 / Monday, January 8, 2001 / Proposed Rules 1435

discount.) Thus, the premium discount

violates paragraph (c) of this section because

it may require an individual to pay a higher

premium based on a health factor of the

individual than is required of a similarly

situated individual under the plan.

Example 4. (i) Facts. Same facts as

Example 3, except that if it is unreasonably

difficult due to a medical condition for a

participant to achieve the targeted cholesterol

count (or if it is medically inadvisable for a

participant to attempt to achieve the targeted

cholesterol count), the plan will make

available a reasonable alternative standard

that takes the relevant medical condition into

account. In addition, all plan materials

describing the terms of the program include

the following statement: ‘‘If it is

unreasonably difficult due to a medical

condition for you to achieve a cholesterol

count under 200, or if it is medically

inadvisable for you to attempt to achieve a

count under 200, call us at the number below

and we will work with you to develop

another way to get the discount.’’ Individual

D is unable to achieve a cholesterol count

under 200. The plan accommodates D by

making the discount available to D, but only

if D complies with a low-cholesterol diet.

(ii) Conclusion. In this Example 4, the

program is a bona fide wellness program

because it satisfies the four requirements of

this paragraph (f). First, the program

complies with the limits on rewards under a

program. Second, it is reasonably designed to

promote good health or prevent disease.

Third, the reward under the program is

available to all similarly situated individuals

because it accommodates individuals for

whom it is unreasonably difficult due to a

medical condition to achieve the targeted

count (or for whom it is medically

inadvisable to attempt to achieve the targeted

count) in the prescribed period by providing

a reasonable alternative standard. Fourth, the

plan discloses in all materials describing the

terms of the program the availability of a

reasonable alternative standard. Thus, the

premium discount does not violate this

section.

Example 5. (i) Facts. A group health plan

will waive the $250 annual deductible

(which is less than [10/15/20] percent of the

annual cost of employee-only coverage under

the plan) for the following year for

participants who have a body mass index

between 19 and 26, determined shortly

before the beginning of the year. However,

any participant for whom it is unreasonably

difficult due to a medical condition to attain

this standard (and any participant for whom

it is medically inadvisable to attempt to

achieve this standard) during the plan year

is given the same discount if the participant

walks for 20 minutes three days a week. Any

participant for whom it is unreasonably

difficult due to a medical condition to attain

either standard (and any participant for

whom it is medically inadvisable to attempt

to achieve either standard during the year) is

given the same discount if the individual

satisfies a reasonable alternative standard

that is tailored to the individual’s situation.

All plan materials describing the terms of the

wellness program include the following

statement: ‘‘If it is unreasonably difficult due

to a medical condition for you to achieve a

body mass index between 19 and 26 (or if it

is medically inadvisable for you to attempt to

achieve this body mass index) this year, your

deductible will be waived if you walk for 20

minutes three days a week. If you cannot

follow the walking program, call us at the

number above and we will work with you to

develop another way to have your deductible

waived, such as a dietary regimen.’’

(ii) Conclusion. In this Example 5, the

program is a bona fide wellness program

because it satisfies the four requirements of

this paragraph (f). First, the program

complies with the limits on rewards under a

program. Second, it is reasonably designed to

promote good health or prevent disease.

Third, the reward under the program is

available to all similarly situated individuals

because it generally accommodates

individuals for whom it is unreasonably

difficult due to a medical condition to

achieve (or for whom it is medically

inadvisable to attempt to achieve) the

targeted body mass index by providing a

reasonable alternative standard (walking) and

it accommodates individuals for whom it is

unreasonably difficult due to a medical

condition (or for whom it is medically

inadvisable to attempt) to walk by providing

an alternative standard that is reasonable for

the individual. Fourth, the plan discloses in

all materials describing the terms of the

program the availability of a reasonable

alternative standard for every individual.

Thus, the waiver of the deductible does not

violate this section.

Example 6. (i) Facts. In conjunction with

an annual open enrollment period, a group

health plan provides a form for participants

to certify that they have not used tobacco

products in the preceding twelve months.

Participants who do not provide the

certification are assessed a surcharge that is

[10/15/20] percent of the cost of employeeonly coverage. However, all plan materials

describing the terms of the wellness program

include the following statement: ‘‘If it is

unreasonably difficult due to a health factor

for you to meet the requirements under this

program (or if it is medically inadvisable for

you to attempt to meet the requirements of

this program), we will make available a

reasonable alternative standard for you to

avoid this surcharge.’’ It is unreasonably

difficult for Individual E to stop smoking

cigarettes due to an addiction to nicotine (a

medical condition). The plan accommodates

E by requiring E to participate in a smoking

cessation program to avoid the surcharge. E

can avoid the surcharge for as long as E

participates in the program, regardless of

whether E stops smoking (as long as E

continues to be addicted to nicotine).

(ii) Conclusion. In this Example 6, the

premium surcharge is permissible as a bona

fide wellness program because it satisfies the

four requirements of this paragraph (f). First,

the program complies with the limits on

rewards under a program. Second, it is

reasonably designed to promote good health

or prevent disease. Third, the reward under

the program is available to all similarly

situated individuals because it

accommodates individuals for whom it is

unreasonably difficult due to a medical

condition (or for whom it is medically

inadvisable to attempt) to quit using tobacco

products by providing a reasonable

alternative standard. Fourth, the plan

discloses in all materials describing the terms

of the program the availability of a reasonable

alternative standard. Thus, the premium

surcharge does not violate this section.

* * * * *

Dated: June 22, 2000.

Nancy-Ann Min DeParle,

Administrator, Health Care Financing

Administration.

Approved: August 29, 2000.

Donna E. Shalala,

Secretary.

[FR Doc. 01–107 Filed 1–5–01; 8:45 am]

BILLING CODE 4120–01–P; 4510–29–P; 4830–01–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

[REG–114082–00]

RIN 1545–AY32

HIPAA Nondiscrimination

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

by cross-reference to temporary

regulations.

SUMMARY: Elsewhere in this issue of the

Federal Register, the IRS is issuing

temporary and final regulations

governing the provisions prohibiting

discrimination based on a health factor

for group health plans. The IRS is

issuing the temporary and final

regulations at the same time that the

Pension and Welfare Benefits

Administration of the U.S. Department

of Labor and the Health Care Financing

Administration of the U.S. Department

of Health and Human Services are

issuing substantially similar interim

final regulations governing the

provisions prohibiting discrimination

based on a health factor for group health

plans and issuers of health insurance

coverage offered in connection with a

group health plan under the Employee

Retirement Income Security Act of 1974

and the Public Health Service Act. The

temporary regulations provide guidance

to employers and group health plans

relating to the group health plan

nondiscrimination requirements. The

text of those temporary regulations also

serves as the text of these proposed

regulations.

DATES: Written comments and requests

for a public hearing must be received by

April 9, 2001.