February 01, 2006

Health plans and employers in general continually struggle to control health care costs. Over the past several years, many plans have turned to disease management and wellness programs (collectively, “DM Programs”) to control health care costs.^[1] However, the legal aspects of DM Programs are frequently not fully appreciated when a DM Program is implemented. This article provides an overview of the legal issues associated with a DM Program.

What is a DM Program? There is no one definition for what constitutes “disease management” or a “wellness program.” However, DM Programs frequently focus on preventing illness or disease before it occurs by, for example, encouraging healthier lifestyles. DM Programs also try to identify individuals at risk for chronic disease and educate individuals on ways to help prevent such diseases. If an individual has a medical condition, a DM Program also may focus on controlling the costs of that condition. Such a personalized focus examines how the individual is being treated and whether different treatments are warranted.

Why Have a DM Program? Various studies indicate that DM Programs can lead to significant cost savings. DM Programs recognize that 50% of the costs of illnesses stem from preventable illness.^[2] Employers who have implemented various forms of preventive programs have seen significant savings, including:

· 28% reduction in sick leave;

· 26% reduction in direct health care costs; and

· 30% reduction in workers’ compensation and disability costs.^[3]

Given these possible savings, plans and employers have a strong incentive to implement DM Programs.

Participation in DM Programs. Few employers typically require participation in a DM Program. Instead, employers typically use one of two methods to encourage participation. The first method is the “carrot” approach. Under this approach, an employer or plan provides an incentive (such as a reduced plan premium) to encourage the individual to participate. The other method is the “stick” approach. Here, an employer or plan imposes a higher cost (or takes away an available discount or benefit) if the individual chooses not to participate in the DM Program.

For example, suppose Carrot Farms, Inc. establishes a DM Program. As part of the program, Carrot encourages all employees to participate in a health risk assessment (a test of overall health, sometimes with a medical examination, blood draw, and questionnaire about health habits). Carrot provides a $200 contribution to a health reimbursement arrangement for participants in the DM Program. The next year, Carrot decides to increase the incentive. Carrot therefore switches the contribution amount to a $40 per month premium discount.

Stick Manufacturing Co. is more aggressive. Stick identifies individuals with chronic medical conditions and requests that these individuals meet with a trained counselor. The counselor discusses the individual’s illness and encourages the individual to take steps to improve their medical condition. The counselor monitors the individual’s activities and prognosis. Failure to meet with the counselor results in 20% higher premiums and co-payments.

What legal risk is Carrot incurring? Are Stick’s actions advisable? As discussed below, both arrangements can raise various legal issues. These include issues under the Americans with Disabilities Act (“ADA”), the nondiscrimination rules of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), HIPAA’s administrative simplification rules (e.g., the privacy rule) and the Consolidated Omnibus Budget Reconciliation Act of 1986 (“COBRA”).

Compliance Issue #1: The ADA

The ADA prohibits discrimination against certain individuals on the basis of an individual’s disability. The ADA is also particularly restrictive in medical examinations of individuals. The ADA states, in relevant part, that an entity subject to the ADA:

[S]hall not require a medical examination and shall not make inquiries of an employee as to whether such employee is an individual with a disability or as to the nature and severity of the disability, unless such examination or inquiry is shown to be job-related and consistent with business necessity.^[4]

The phrases “job-related” and “consistent with business necessity” have been given a strict interpretation from courts. In general, a disability-related examination or inquiry is acceptable only if there is “evidence sufficient for a reasonable person to doubt whether an employee is capable of performing the job, and that any examination [must] be limited to determining an employee’s ability to perform essential job functions.”^[5] For example, it would be permissible for an employer to test the vision of a police officer who may be having vision problems, since vision is an important component of the officer’s job. However, it would not be permissible to test the same officer for the HIV virus, since HIV-status is not directly related to the officer’s job.

This standard seems to prevent most employers from requiring broad-based medical examinations of all employees. If such tests were deemed disability-related, the tests appear to go beyond what is allowed by the ADA because they would not be limited to determining an employee’s ability to perform essential job functions. Thus, mandatory disability examinations or inquiries face significant hurdles under the ADA.^[6]

What about voluntary medical examinations or inquiries? Are they subject to the ADA’s stringent provisions? The Equal Employment Opportunity Commission (“EEOC”) has issued an enforcement manual addressing this subject. The manual contains the following question and answer:

May an employer make disability-related inquiries or conduct medical examinations that are part of its voluntary wellness program?

Yes, the ADA allows employers to conduct voluntary medical examinations and activities, including voluntary medical histories, which are part of an employee health program without having to show that they are job-related and consistent with business necessity, as long as any medical records acquired as part of the wellness program are kept confidential and separate from personnel records. These programs often include blood pressure screening, cholesterol testing, glaucoma testing, and cancer detection screening. Employees may be asked disability-related questions and may be given medical examinations pursuant to such voluntary wellness programs.

A wellness program is “voluntary” as long as an employer neither requires participation nor penalizes employees who do not participate.

Thus, the EEOC distinguishes between “mandatory” examinations / inquiries and “voluntary” examinations / inquiries. The former are subject to heightened standards (job-related and consistent with business necessity) while the latter need not satisfy such heightened standards.

Let’s apply this distinction to our two companies, above, Carrot and Stick. Is Carrot’s DM Program a “voluntary” program? Is Stick’s? Will one or both be “mandatory” programs? No guidance specifically addresses these issues. The EEOC (or an aggrieved employee) could argue that neither program is “voluntary.” The EEOC could argue that Carrot’s monetary rewards for participating ($200 contribution or $40 per month premium discount) are so significant that no employee could afford to pass up the rewards. If so, the program could be deemed “mandatory”, subjecting it to the more-stringent business necessity tests described above. Similarly, Stick’s 20% higher premiums and co-payments also could be so significant that employees effectively could not refuse to participate. If so, this program also could be deemed “mandatory.” If either Carrot’s or Stick’s program is deemed “mandatory,” the program will have a difficult time satisfying the “job-related” and “business-necessity” tests.

The author has discussed this issue with an EEOC official. The EEOC official indicated that minor rewards (a coffee mug or t-shirt) would not cause a DM Program to be deemed “mandatory.” Very large rewards (e.g., a 50% premium discount) would, in this official’s opinion, cause the DM Program to be deemed mandatory. However, the official acknowledged that there is a gray area for monetary awards that are not insubstantial (e.g., 10%) but not so high that an employee would feel obligated to participate in the DM Program. Rewards in this gray area may or may not cause a DM Program to be deemed mandatory. Formal EEOC clarification on this issue would be helpful.

Note also that an additional ADA section may allow an employer or plan to operate a DM Program without being subjected to the ADA’s restrictive provisions. This section provides that various entities, including an insurer or any agent or entity that administers benefit plans, may underwrite risks, classify risks or administer such risks that are based on or not inconsistent with state law.^[7] Activities that are permissible under this section will not violate part 1630 of the ADA regulations—the portion of the regulations that imposes the ADA’s restrictive job-related/business necessity tests for medical inquiries or examinations.^[8]

Operating a DM Program may be considered the “underwriting” or “classifying” of risks. Risk classification is the “identification of risk factors and the grouping of those factors that pose similar risks.”^[9] Underwriting is the “application of the various risk factors or risk classes to a particular individual or group (usually only if the group is small) for the purpose of determining whether to provide insurance.”^[10] These definitions are difficult to apply to a DM Program, but may be broad enough to allow an employer to argue that its DM Program is “classifying” or “underwriting” risk. If so, an employer could require participation in a DM Program without satisfying the “job-related” and “business necessity” tests.

Only one published case interprets this exception.^[11] The case may support a somewhat broad reading of these terms. In the case, an employer terminated an employee who refused to complete a health insurance enrollment form which required the employee to disclose certain health information. The employee argued that the form was a medical inquiry subject to the ADA’s stringent provisions (requiring a showing that the form was job-related and for a business necessity). The employer argued that it could require the employee to complete the form without subjecting the employer to the ADA’s stringent provisions, because the form was used by the insurer to “classify” or “underwrite” risk. The court agreed with the employer. Thus, the employer did not need to satisfy the job-related, business necessity test and could require that the employee complete the application form.

It remains to be seen whether the same result would occur in different scenarios. It is possible a court would reach a different result if a plan was self-funded or the plan was ongoing, as opposed to just beginning.

Compliance Issue #2: HIPAA Nondiscrimination Rules

The HIPAA nondiscrimination rules prohibit a health plan from providing different eligibility rules or benefits on the basis of an individual’s health status.^[12] However, these rules were not intended to “prevent a group health plan . . . from establishing premium discounts or copayments or deductibles in return for adherence to programs of health promotion and disease prevention.”^[13]

Proposed regulations allow variations in premiums and discounts under a “bona fide wellness program” (a “BFWP”).^[14] Any wellness program that provides a reward based on a health factor must satisfy the BFWP requirements. Such a program must:

· Limit the reward to a specified percentage (not exceeding 10%, 15% or 20% of the total cost of employee-only coverage). This reward can be in the form of a discount, waiver of a charge or other, similar item;

· Be reasonably designed to promote health or prevent disease;

· Be available to all similarly situated individuals. If the program cannot be satisfied by someone due to a medical condition an alternative must be provided. For example, Acme Co. could provide a 10% discount for ceasing to smoke. Ed, an employee of Acme, cannot stop smoking due to his addiction to nicotine (a medical condition). Ed must be allowed to receive the 10% discount pursuant to an alternative, such as attending a class educating Ed about the risks of smoking. This alternative would be acceptable because the 10% discount is available to Ed regardless of whether Ed actually ceases to smoke; and

· Provide notice that individual accommodations are possible.^[15]

Examples of BFWP include a bonus or discount for cholesterol below 200 or a surcharge for employees that use tobacco products, subject to the restrictions noted above (e.g., establishing alternatives for individuals when the individuals cannot meet the requirements due to a health condition).

Wellness programs also may provide benefits or discounts regardless of the individual’s health status. If so, the program will not be subject to HIPAA’s nondiscrimination rules. For example, a program may provide a discounted gym membership. Such a program is not subject to HIPAA’s nondiscrimination rules.^[16]

There is some tension between the ADA rules and the HIPAA nondiscrimination rules. For example, an employer may intend for its DM Program to be a BFWP under HIPAA and not relate specifically to disabilities, therefore avoiding the ADA. However, if the BFWP makes a medical inquiry, the employer may be subject to the stringent ADA rules. If so, the employer would have to demonstrate that the inquiry was job-related and consistent with business necessity. This would be a high standard and one that the employer may struggle to demonstrate.

Compliance Issue #3: HIPAA Administrative Simplification Rules

HIPAA’s administrative simplification rules (including the privacy rules, security rules and standard transaction rules) apply to particular covered entities, including a “health plan.” The phrase “health plan” is broadly defined by HIPAA’s administrative simplification rules. It includes an individual or group plan that provides, or pays the cost of, “medical care.”^[17] “Medical care” includes, among other things, amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or amounts paid for the purpose of affecting any structure or function of the body.^[18]

No guidance specifically addresses whether a DM Program will be considered, by itself, to be a health plan. The result probably depends on the specific features of the DM Program. A basic DM Program that only provides a wellness newsletter once per quarter would not be related to an individual’s specific medical situation and likely would not constitute a health plan. An intense scrutiny of an individual’s health status, involving a blood draw and analysis of cholesterol levels and other risk factors, along with a discussion of these risk factors with the individual, could constitute “medical care” and create a “health plan.”

Sometimes, a plan or employer will include a DM Program as part of a medical plan. If so, the DM Program is even more likely to be subject to HIPAA’s administrative simplification rules.

A DM Program subject to these HIPAA rules must comply with all aspects of the rules. This includes identifying business associates and entering into business associate agreements.^[19] It also could include a plan amendment, if the plan sponsor will receive individually identifiable information about participants in the DM Program.^[20] There are many other potential actions that would be needed, including maintaining the security of electronic protected health information related to the DM Program and ensuring compliance with HIPAA’s standard transaction rules.

Compliance Issue #4: COBRA

COBRA regulates many “group health plans.” The phrase “group health plan” is similar to HIPAA’s use of the phrase “health plan.”^[21] Thus, a sponsor must conduct a fact-specific inquiry to determine if a DM Program is subject to COBRA. If the DM Program is subject to COBRA, a sponsor should ensure that a COBRA enrollee understands that the DM Program is available, perhaps by explaining this in the required COBRA notices. A sponsor also may be required to continue offering premium discounts (or other rewards) to COBRA enrollees who continue participating in the DM Program.

Difficult COBRA issues can arise in certain circumstances. For example, some sponsors offer a DM Program to all employees, even if the employees do not participate in the health plan. If the DM Program is subject to COBRA, the sponsor must take great care to ensure that DM Program enrollees who do not participate in the health plan receive the proper COBRA benefits for the DM Program. It also would require the sponsor to calculate the proper COBRA premiums. Calculating this premium may be difficult for a stand-alone DM Program that is not part of a health plan.

Other Laws

DM Programs can be subject to other laws, including state laws. A plan or employer should carefully assess these other laws to examine what effect they have on its DM Program.