[Federal Register Volume 66, Number 5 (Monday, January 8, 2001)]
[Proposed Rules]
[Pages 1421-1435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-107]



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

[[Page 1421]]


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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.

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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 e-mail to: <a href="/cdn-cgi/l/email-protection#a9feccc5c5c7ccdadae9d9decbc887cdc6c587cec6df"><span class="__cf_email__" data-cfemail="a2f5c7cececcc7d1d1e2d2d5c0c38cc6cdce8cc5cdd4">[email protected]</span></a>.
    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

[[Page 1422]]

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, cost-sharing 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--
    <bullet> 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;
    <bullet> Encourage preventive care through the waiver of the 
copayment or deductible requirement for the costs of well-baby visits;
    <bullet> Reimburse employees for the cost of health club 
memberships, without regard to any health factors relating to the 
employees; or
    <bullet> 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 cost-sharing 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 employee-
only 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

[[Page 1423]]

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.
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    \1\ Under 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.
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    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

[[Page 1424]]

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

[[Page 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 one-half 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

[[Page 1426]]

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:
    <bullet> The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
    <bullet> The accuracy of our estimate of the information collection 
burden.
    <bullet> The quality, utility, and clarity of the information to be 
collected.
    <bullet> 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 foreign-based 
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.

[[Page 1427]]

    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 non-discrimination 
provisions in only two States.
---------------------------------------------------------------------------

    \2\ This 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.
---------------------------------------------------------------------------

    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:
    <bullet> 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.)
    <bullet> 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 already-existing 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 State-Federal 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

[[Page 1428]]

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 well-designed 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 employee-only 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 low-to-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 one-fourth 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

[[Page 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 non-
smokers, 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.

[[Page 1430]]

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 non-smoker 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

[[Page 1431]]

transfers that may derive from this requirement.
---------------------------------------------------------------------------

    \3\ Average 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.
---------------------------------------------------------------------------

    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:


Sec. 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 cost-
sharing 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

[[Page 1432]]

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 employee-only 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:


Sec. 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 cost-
sharing 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

[[Page 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.

[[Page 1434]]

Participants who do not provide the certification are assessed a 
surcharge that is [10/15/20] percent of the cost of employee-only 
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 Sec. 146.121 by adding text to paragraph (b) 
to read as follows:


Sec. 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 cost-
sharing 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

[[Page 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 employee-only 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


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