Notice of Proposed Rulemaking for
Bona Fide Wellness Programs

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

TITLE: Notice of Proposed Rulemaking for Bona Fide Wellness Programs

AGENCIES: Internal Revenue Service, DEPARTMENT OF THE TREASURY;
Pension and Welfare Benefits Administration, Department of Labor;
Health Care Financing Administration, Department of Health and Human
Services.

ACTION: Notice of proposed rulemaking and request for comments.

SUMMARY: This proposed rule would implement and clarify the term
"bona fide wellness program" as it relates to regulations
implementing the nondiscrimination provisions of the Internal
Revenue Code, the Employee Retirement Income Security Act, and the
Public Health Service Act, as added by the Health Insurance
Portability and Accountability Act of 1996.

DATES: Written comments on this notice of proposed rulemaking are
invited and must be received by the Departments on or before April
9, 2001.

ADDRESSES: Written comments should be submitted with a signed
original and three copies (except for electronic submissions to the
Internal Revenue Service (IRS) or Department of Labor) to any of the
addresses specified below. Any comment that is submitted to any
Department will be shared with the other Departments.

Comments to the IRS can be addressed to: 

CC:M&SP:RU (REG-114084-00)           
Room 5226    
Internal Revenue Service   
POB 7604, Ben Franklin Station     
Washington, DC 20044

In the alternative, comments may be hand-delivered between the hours
of 8 a.m. and 5 p.m. to:

CC:M&SP:RU (REG-114084-00)           
Courier's Desk   
Internal Revenue Service   
1111 Constitution Avenue, NW.      
Washington DC 20224

Alternatively, comments may be transmitted electronically via the
IRS Internet site at:

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: Wellness@pwba.dol.gov.

Comments to HHS can be addressed to:      

Health Care Financing administration    
Department of Health and Human Services      
Ltention: 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.

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).

SUPPLEMENTARY INFORMATION:

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 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 --



 Provide voluntary testing of enrollees for specific health
problems and make recommendations to address health problems
identified, if the program did not base any reward on the outcome of
the health assessment;

 Encourage preventive care through the waiver of the copayment
or deductible requirement for the costs of well-baby visits;

 Reimburse employees for the cost of health club memberships,
without regard to any health factors relating to the employees;
or

 Reimburse employees for the costs of smoking cessation
programs, without regard to whether the employee quits smoking.



A wellness program that provides a reward based on the ability of an
individual to meet a standard related to a health factor violates
the interim regulations published elsewhere in this issue of the
Federal Register unless it is a bona fide wellness program. Under
these proposed regulations, a wellness program must meet four
requirements to be a bona fide wellness program. First, the total
reward that may be given to an individual under the plan for all
wellness programs is limited. A reward can be in the form of a
discount, a rebate of a premium or contribution, or a waiver of all
or part of a 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 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 nicotine1, the individual must be
provided a reasonable alternative standard to obtain the reward. The
fourth requirement to be a bona fide wellness program under the
proposed regulations is that all plan materials describing the terms
of the program must disclose the availability of a reasonable
alternative standard. The proposed regulations include model
language that can be used to satisfy this requirement; examples also
illustrate substantially similar language that would satisfy the
requirement.

The proposed regulations contain two clarifications of this fourth
requirement. First, plan materials are not required to describe
specific reasonable alternative standards. It is sufficient to
disclose that some reasonable alternative standard will be made
available. Second, any plan materials that describe the general
standard would also have to disclose the availability of a
reasonable alternative standard. However, if the program is merely
mentioned (and does not describe the general standard), disclosure
of the availability of a reasonable alternative standard is not
required.

III. Economic Impact and Paperwork Burden

Summary - Department of Labor and Department of Health and Human
Services Under the proposed regulation, health plans generally may
vary employee premium contributions or benefit levels across
similarly situated individuals based on health status factors only
in connection with bona fide wellness programs. The regulation
establishes four requirements for such bona fide wellness programs.
It (1) limits the permissible amount of variation in employee
premium or benefit levels; (2) requires that programs be reasonably
designed to promote health or prevent disease; (3) requires programs
to permit plan participants who for medical reasons would incur
unreasonable difficulty to satisfy the programs' initial wellness
standards to satisfy reasonable alternative standards instead; and
(4) requires certain plan materials to disclose the availability of
such alternative standards. The Departments carefully considered the
costs and benefits attendant to these requirements. The Departments
believe that the benefits of these requirements exceed their costs.

The Departments anticipate that the proposed regulation will result
in transfers of cost among plan sponsors and participants and in new
economic costs and benefits. Economic benefits will flow from plan
sponsors' efforts to maintain wellness programs' effectiveness where
discounts or surcharges are reduced and from plans sponsors'
provision of reasonable alternative standards that help improve
affected plan participants' health habits and health. The result
will be fewer instances where wellness programs merely shift costs
to high risk individuals and more instances where they succeed at
improving such individuals' health habits and health.

Transfers will arise because the size of some discounts and
surcharges will be reduced, and because some plan participants who
did not satisfy wellness programs' initial standards will satisfy
alternative standards. These transfers are estimated to total
between $18 million and $46 million annually. (The latter figure is
an upper bound, reflecting the case in which all eligible
participants pursue and satisfy alternative standards.)

New economic costs may be incurred if reductions in discounts or
surcharges reduce wellness programs' effectiveness, but this effect
is expected to be very small because reductions will be small and
relatively few plans and participants will be affected. Other new
economic costs will be incurred by plan sponsors to make available
reasonable alternative standards where required. The Departments
were unable to estimate these costs but are confident that these
costs in combination with the transfers referenced above will not
exceed the estimate of the transfers alone. Affected plan sponsors
can satisfy the proposed regulation's third requirement by making
available any reasonable standard they choose, including low cost
alternatives. It is unlikely that plan sponsors would choose
alternative standards whose cost, in combination with costs
transferred from participants who satisfy them, would exceed the
cost of providing discounts or waiving surcharges for all eligible
participants.

Executive Order 12866 - Department of Labor and Department of Health
and Human Services

Under Executive Order 12866, the Departments must determine whether
a regulatory action is "significant" and therefore subject to the
requirements of the Executive Order and subject to review by the
Office of Management and Budget (OMB). Under section 3(f), the order
defines a "significant regulatory action" as an action that is
likely to result in a rule (1) having an annual effect on the
economy of $100 million 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
C.F.R. §§ 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 $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 Description (SPD) and Summary of Material
Modifications (SMM), as currently approved under OMB control number
1210-0039, incorporates an assumption concerning a constant rate of
revision in these disclosure materials which is based on plans'
actual reporting on the annual report/return (Form 5500) of their
rates of modification. This occurrence of SPD revisions is generally
more frequent than the minimum time frames described in section
104(b) and related regulations. The annual hour and cost burdens of
the SMM/SPD information collection request is currently estimated at
576,000 hours and $97 million. Because the burden of modifying a
wellness program's disclosures is expected to be negligible, and
readily incorporated in other revisions made to plan materials on an
ongoing basis, the methodology used already accounts for this type
of change. Therefore, the Department concludes that the modification
described in this proposal to the information collection request is
neither substantive nor material, and accordingly it attributes no
burden to this regulation.

Department of Health and Human Services

Under the Paperwork Reduction Act of 1995, we are required to
provide 60-day notice in the Federal Register and solicit public
comment before a collection of information requirement is submitted
to the Office of Management and Budget (OMB) for review and
approval. In order to fairly evaluate whether an information
collection should be approved by OMB, section 3506(c)(2)(A) of the
Paperwork Reduction Act of 1995 requires that we solicit comment on
the following issues:



 The need for the information collection and its usefulness in
carrying out the proper functions of our agency.

 The accuracy of our estimate of the information collection
burden.

 The quality, utility, and clarity of the information to be
collected.

 Recommendations to minimize the information collection burden
on the affected public, including automated collection
techniques.
 Section 146.121 Prohibiting discrimination against
participants and beneficiaries based on a health factor.



(f) Bona fide wellness programs Paragraph (1)(iv) requires the plan
or issuer to disclose in all plan materials describing the terms of
the program the availability of a reasonable alternative standard
required under paragraph (f)(1)(iii) of this section. However, in
plan materials that merely mention that a program is available,
without describing its terms, the disclosure is not required. This
requirement will affect the estimated 1,300 nonfederal governmental
plans that apply premium discounts or surcharges. The development of
the materials is expected to take 100 hours for nonfederal
governmental plans. The corresponding burden performed by service
providers is estimated to be $38,000.

We have submitted a copy of this rule to OMB for its review of the
information collection requirements. These requirements are not
effective until they have been approved by OMB. A notice will be
published in the Federal Register when approval is obtained. If you
comment on any of these information collection and record keeping
requirements, please mail copies directly to the following:

Health Care Financing Administration, Office of Information
Services, Information Technology Investment Management Group,
Division of HCFA Enterprise Standards, Room C2-26-17, 7500 Security
Boulevard, Baltimore, MD 21244-1850, Attn: John Burke HCFA-2078-P,

and

Office of Information and Regulatory Affairs, Office of Management
and Budget, Room 10235, New Executive Office Building, Washington,
DC 20503, Attn.: Allison Herron Eydt, HCFA-2078-P.

Small Business Regulatory Enforcement Fairness Act

The proposed rule is subject to the provisions of the Small Business
Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.)
and, if finalized, will be transmitted to Congress and the
Comptroller General for review. The rule is not a "major rule" as
that term is defined in 5 U.S.C. 804, because it is not likely to
result in (1) an annual effect on the economy of $100 million or
more; (2) a major increase in costs or prices for consumers,
individual industries, or federal, State, or local government
agencies, or geographic regions; or (3) significant adverse effects
on competition, employment, investment, productivity, innovation, or
on the ability of United States-based enterprises to compete with
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.

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, 104 Cong. 2d Session 205 (1996). Consequently, under
the th 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 authority2. 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.

Although the Departments conclude that these proposed regulations do
not have federalism implications, in keeping with the spirit of the
Executive Order that agencies closely examine any policies that may
have federalism implications or limit the policy making discretion
of the States, the Department of Labor and HCFA have engaged in
numerous efforts to consult with and work cooperatively with
affected State and local officials.

For example, the Departments were aware that some States commented
on the way the federal provisions should be interpreted. Therefore,
the Departments have sought and received input from State insurance
regulators and the National Association of Insurance Commissioners
(NAIC). The NAIC is a non-profit corporation established by the
insurance commissioners of the 50 States, the District of Columbia,
and the four U.S. territories, that among other things provides a
forum for the development of uniform policy when uniformity is
appropriate. Its members meet, discuss, and offer solutions to
mutual problems. The NAIC sponsors quarterly meetings to provide a
forum for the exchange of ideas, and in-depth consideration of
insurance issues by regulators, industry representatives, and
consumers. HCFA and Department of Labor staff have attended the
quarterly meetings consistently to listen to the concerns of the
State Insurance Departments regarding HIPAA issues, including the
nondiscrimination provisions. In addition to the general
discussions, committee meetings and task groups, the NAIC sponsors
the following two standing HIPAA meetings for members during the
quarterly conferences:



HCFA/DOL Meeting on HIPAA Issues (This meeting provides HCFA and
Labor the opportunity to provide updates on regulations, bulletins,
enforcement actions and outreach efforts regarding HIPAA.)

The NAIC/HCFA Liaison Meeting (This meeting provides HCFA and
the NAIC the opportunity to discuss HIPAA and other health care
programs.)
 

In their comments on the 1997 interim rules, the NAIC suggested that
the permissible standards for determining bona fide wellness
programs ensure that such programs are not used as a proxy for
discrimination based on a health factor. The NAIC also commented
that the nondiscrimination provisions of HIPAA "are especially
significant in their impact on small groups, and particularly in
small groups, where there is a great potential for adverse selection
and gaming." One State asked that the Departments' final
nondiscrimination provisions be as consumer-protective as possible.
Finally, another State described 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 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.

------------------------+------------+---------- 
Single employee total   |$2,448      |
premium                 |            |
------------------------+------------+------+---- 
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 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
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. 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, the maximum allowable discount of
15 percent amounts 3 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 transfers that may derive from
this requirement.

Disclosure of Alternatives' Availability -- The fourth requirement
provides that plan materials describing wellness plan standards must
disclose the availability of reasonable alternative standards. This
requirement will affect the 37,000 plans that apply discounts or
surcharges. These plans will incur economic costs to revise affected
plan materials. The 37,000 to 148,000 participants who will succeed
at satisfying these alternative standards will benefit from these
disclosures. The disclosures need not specify what alternatives are
available, and the regulation provides model language that can be
used to satisfy this requirement. The Departments generally account
elsewhere for plans' cost of updating such materials to reflect
changes in plan provisions as required under various disclosure
requirements and as is part of usual business practice. This
particular requirement is expected to represent a negligible
fraction of the ongoing cost of updating plans' materials, and is
not separately accounted for here.

List of Subjects

26 CFR Part 54

Excise taxes, Health care, Health insurance, Pensions, Reporting and
recordkeeping requirements.

29 CFR Part 2590

Employee benefit plans, Employee Retirement Income Security Act,
Health care, Health insurance, Reporting and recordkeeping
requirements.

45 CFR Part 146

Health care, Health insurance, Reporting and recordkeeping
requirements, and State regulation of health insurance.

Proposed Amendments to the Regulations Accordingly, 26 CFR part 54
is proposed to be amended as follows:

PART 54 -- PENSION EXCISE TAXES

Paragraph 1. The authority citation for part 54 continues to read in
part as follows: Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 54.9802-1 is amended by adding text to paragraph (f)
to read as follows: §54.9802-1 Prohibiting discrimination
against participants and beneficiaries based on a health factor.

* * * * *

(f) Bona fide wellness programs --

(1) Definition. A wellness program is a bona fide wellness program
if it satisfies the requirements of paragraphs (f)(1)(i) through (f)
(1)(iv) of this section. However, a wellness program providing a
reward that is not contingent on satisfying a standard related to a
health factor does not violate this section even if it does not
satisfy the requirements of this paragraph (f) for a bona fide
wellness program.

(i) The reward for the wellness program, coupled with the reward for
other wellness programs with respect to the plan that require
satisfaction of a standard related to a health factor, must not
exceed [10/15/20] percent of the cost of employee-only coverage
under the plan. For this purpose, the cost of employee-only coverage
is determined based on the total amount of employer and employee
contributions for the benefit package under which the employee is
receiving coverage. A reward can be in the form of a discount, a
rebate of a premium or contribution, or a waiver of all or part of a
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 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 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 revised by adding text to
paragraph (f) to read as follows:

§ 2590.702 Prohibiting discrimination against participants and
beneficiaries based on a health factor.

* * * * *

(f) Bona fide wellness programs --

(1) Definition. A wellness program is a bona fide wellness program
if it satisfies the requirements of paragraphs (f)(1)(i) through (f)
(1)(iv) of this section. However, a wellness program providing a
reward that is not contingent on satisfying a standard related to a
health factor does not violate this section even if it does not
satisfy the requirements of this paragraph (f) for a bona fide
wellness program.

(i) The reward for the wellness program, coupled with the reward for
other wellness programs with respect to the plan that require
satisfaction of a standard related to a health factor, must not
exceed [10/15/20] percent of the cost of employee-only coverage
under the plan. For this purpose, the cost of employee-only coverage
is determined based on the total amount of employer and employee
contributions for the benefit package under which the employee is
receiving coverage. A reward can be in the form of a discount, a
rebate of a premium or contribution, or a waiver of all or part of a
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 discount.) Thus, the premium discount violates paragraph
(c) of this section because it may require an individual to pay a
higher premium?-51- 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.

* * * * *

Signed at Washington, DC this _________ day of
_________________________, 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 revise § 146.121 by adding text to paragraph
(f) to read as follows: § 146.121 Prohibiting discrimination
against participants and beneficiaries based on a health factor.

* * * * *

(f) Bona fide wellness programs --

(1) Definition. A wellness program is a bona fide wellness program
if it satisfies the requirements of paragraphs (f)(1)(i) through (f)
(1)(iv) of this section. However, a wellness program providing a
reward that is not contingent on satisfying a standard related to a
health factor does not violate this section even if it does not
satisfy the requirements of this paragraph (f) for a bona fide
wellness program.

(i) The reward for the wellness program, coupled with the reward for
other wellness programs with respect to the plan that require
satisfaction of a standard related to a health factor, must not
exceed [10/15/20] percent of the cost of employee-only coverage
under the plan. For this purpose, the cost of employee-only coverage
is determined based on the total amount of employer and employee
contributions for the benefit package under which the employee is
receiving coverage. A reward can be in the form of a discount, a
rebate of a premium or contribution, or a waiver of all or part of a
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 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:___________________________

Nancy-Ann Min DeParle,
Administrator, Health Care
Financing Administration.

Approved:___________________________
Donna E. Shalala,
Secretary.

BILLING CODE 4120-01-P

_____________________________________________________________________

Under the Diagnostic and Statistical Manual of Mental Disorders,
Fourth Edition, 1 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.

This authority applies to insurance issued with respect to group
health plans 2 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.

Average level based on the Kaiser Family Foundation/Health Research
and Education 3 Trust Survey of Employer- Sponsored Health benefits,
1999, projected by the Departments to 2000 levels.

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