Nondiscrimination and Wellness Programs in Health Coverage in the Group Market, 75014-75055 [06-9557]

Agencies

• Centers for Medicare & Medicaid Services
• Employee Benefits Security Administration
• DEPARTMENT OF HEALTH AND HUMAN SERVICES
• Internal Revenue Service
• DEPARTMENT OF LABOR
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 71, Number 239 (Wednesday, December 13, 2006)]
[Rules and Regulations]
[Pages 75014-75055]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-9557]



[[Page 75013]]

  
  
  
  
  
  
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Part III





Department of the Treasury





Internal Revenue Service



26 CFR Part 54



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Department of Labor





Employee Benefits Security Administration

29 CFR Part 2590



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Department of Health and Human Services





Centers for Medicare & Medicaid Services

45 CFR Part 146



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Nondiscrimination and Wellness Programs in Health Coverage in the Group 
Market; Final Rules

Federal Register / Vol. 71, No. 239 / Wednesday, December 13, 2006 / 
Rules and Regulations

[[Page 75014]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 54

[TD 9298]
RIN 1545-AY32

DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2590

RIN 1210-AA77

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

45 CFR Part 146

RIN 0938-AI08


Nondiscrimination and Wellness Programs in Health Coverage in the 
Group Market

AGENCIES: Internal Revenue Service, Department of the Treasury; 
Employee Benefits Security Administration, Department of Labor; Centers 
for Medicare & Medicaid Services, Department of Health and Human 
Services.

ACTION: Final rules.

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SUMMARY: This document contains final rules governing the provisions 
prohibiting discrimination based on a health factor for group health 
plans and issuers of health insurance coverage offered in connection 
with a group health plan. The rules contained in this document 
implement changes made to the Internal Revenue Code of 1986 (Code), the 
Employee Retirement Income Security Act of 1974 (ERISA), and the Public 
Health Service Act (PHS Act) enacted as part of the Health Insurance 
Portability and Accountability Act of 1996 (HIPAA).

DATES: Effective date. These final regulations are effective February 
12, 2007.
    Applicability dates. These final regulations apply for plan years 
beginning on or after July 1, 2007.

FOR FURTHER INFORMATION CONTACT: Russ Weinheimer, Internal Revenue 
Service, Department of the Treasury, at (202) 622-6080; Amy Turner or 
Elena Lynett, Employee Benefits Security Administration, Department of 
Labor, at (202) 693-8335; or Karen Levin or Adam Shaw, Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
at (877) 267-2323 extension 65445 and 61091, respectively.
    Customer Service Information: Individuals interested in obtaining 
copies of Department of Labor publications concerning health care laws 
may request copies by calling the Department of Labor (DOL), Employee 
Benefits Security Administration (EBSA) Toll-Free Hotline at 1-866-444-
EBSA (3272) or may request a copy of the Department of Health and Human 
Services (HHS), Centers for Medicare & Medicaid Services (CMS) 
publication entitled ``Protecting Your Health Insurance Coverage'' by 
calling 1-800-633-4227. These regulations as well as other information 
on HIPAA's nondiscrimination rules and other health care laws are also 
available on the Department of Labor's Web site (https://www.dol.gov/
ebsa), including the interactive web pages Health Elaws.

SUPPLEMENTARY INFORMATION:

I. Background

    The Health Insurance Portability and Accountability Act of 1996 
(HIPAA), Public Law 104-191 (110 Stat. 1936), 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 based on a 
health factor. Interim final rules implementing the HIPAA provisions 
were published in the Federal Register on April 8, 1997 (62 FR 16894) 
(1997 interim rules). On December 29, 1997, the Department of Labor, 
the Department of Health and Human Services, and the Department of the 
Treasury (the Departments) published a clarification of the April 1997 
interim rules as they relate to individuals who were denied coverage 
before the effective date of HIPAA on the basis of any health factor 
(62 FR 67689).
    On January 8, 2001, the Departments published interim final 
regulations (2001 interim rules) on many issues under the HIPAA 
nondiscrimination provisions (66 FR 1378) and proposed regulations on 
wellness programs under those nondiscrimination provisions (66 FR 
1421). These regulations being published today in the Federal Register 
finalize both the 2001 interim rules and the proposed rules.

II. Overview of the Regulations

    Section 9802 of the Code, section 702 of ERISA, and section 2702 of 
the PHS Act (the HIPAA nondiscrimination provisions) establish rules 
generally prohibiting group health plans and group health insurance 
issuers from discriminating against individual participants or 
beneficiaries based on any health factor of such participants or 
beneficiaries. The 2001 interim rules --
     Explained the application of these provisions to benefits;
     Clarified the relationship between the HIPAA 
nondiscrimination provisions and the HIPAA preexisting condition 
exclusion limitations;
     Explained the application of these provisions to premiums;
     Described similarly situated individuals;
     Explained the application of these provisions to actively-
at-work and nonconfinement clauses; and
     Clarified that more favorable treatment of individuals 
with medical needs generally is permitted.
    In general, these final regulations do not change the 2001 interim 
rules or the proposed rules on wellness programs. However, these 
regulations do not republish the expired transitional rules regarding 
individuals who were denied coverage based on a health factor prior to 
the applicability date of the 2001 interim rules. (These regulations do 
republish, and slightly modify, the special transitional rule for self-
funded nonfederal governmental plans that had denied any individual 
coverage due to the plan's election to opt out of the nondiscrimination 
requirements under 45 CFR 146.180, in cases where the plan sponsor 
subsequently chooses to bring the plan into compliance with those 
requirements). These regulations clarify how the source-of-injury rules 
apply to the timing of a diagnosis of a medical condition and add an 
example to illustrate how the benefits rules apply to the carryover 
feature of health 0reimbursement arrangements (HRAs). For wellness 
programs, the final regulations clarify some ambiguities in the 
proposed rules, make some changes in terminology and organization, and 
add a description of wellness programs not required to satisfy 
additional standards.

Application to Benefits

    Under the 2001 interim rules and these regulations, a plan or 
issuer is not required to provide coverage for any particular benefit 
to any group of similarly situated individuals. However, benefits 
provided must be uniformly available to all similarly situated

[[Page 75015]]

individuals. Likewise, any restriction on a benefit or benefits 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 (determined based on 
all the relevant facts and circumstances).
    With respect to these benefit rules, the Departments received many 
inquiries about HRAs and one comment about nondiscrimination 
requirements under other laws. Under HRAs, employees are reimbursed for 
medical expenses up to a maximum amount for a period, based on the 
employer's contribution to the plan. These plans may or may not be 
funded. Another common feature is that the plans typically allow 
amounts remaining available at the end of the period to be used to 
reimburse medical expenses in later periods. Because the maximum 
reimbursement available under a plan to an employee in any single 
period may vary based on the claims experience of the employee, 
concerns have arisen about the application of the HIPAA 
nondiscrimination rules to these plans.
    To address these concerns, these final regulations include an 
example under which the carryforward of unused employer-provided 
medical care reimbursement amounts to later years does not violate the 
HIPAA nondiscrimination requirements, even though the maximum 
reimbursement amount for a year varies among employees within the same 
group of similarly situated individuals based on prior claims 
experience. In the example, an employer sponsors a group health plan 
under which medical care expenses are reimbursed up to an annual 
maximum amount. The maximum reimbursement amount with respect to an 
employee for a year is a uniform amount multiplied by the number of 
years the employee has participated in the plan, reduced by the total 
reimbursements for prior years. Because employees who have participated 
in the plan for the same length of time are eligible for the same total 
benefit over that length of time, the example concludes that the 
arrangement does not violate the HIPAA nondiscrimination requirements.
    The Equal Employment Opportunity Commission (EEOC) asked the 
Departments to clarify that certain plan practices or provisions 
permitted under the benefits paragraphs of the 2001 interim rules may 
violate the Americans with Disabilities Act of 1990 (ADA) or Title VII 
of the Civil Rights Act of 1964 (Title VII). Specifically, the 2001 
interim rules allow plans to exclude or limit benefits for certain 
types of conditions or treatments. The EEOC commented that, if such a 
benefit limit were applied to AIDS, it would be a disability-based 
distinction that violates the ADA (unless it is permitted under section 
501(c) of the ADA). In addition, the EEOC commented that an exclusion 
from coverage of prescription contraceptives, but not of other 
preventive treatments, would violate Title VII because prescription 
contraceptives are used exclusively by women.
    Paragraph (h) of the 2001 interim rules and these final regulations 
is entitled ``No effect on other laws.'' This section clarifies that 
compliance with the nondiscrimination rules is not determinative of 
compliance with any other provision of ERISA, or any other State or 
Federal law, including the ADA. Moreover, in paragraph (b) of the 2001 
interim rules and these final regulations, the general rule governing 
the application of the nondiscrimination rules to benefits clarifies 
that whether any plan provision or practice with respect to benefits 
complies with these rules does not affect whether the provision or 
practice is permitted under any other provision of the Code, ERISA, or 
the PHS Act, the Americans with Disabilities Act, or any other law, 
whether State or Federal.
    Many other laws may regulate plans and issuers in their provision 
of benefits to participants and beneficiaries. These laws include the 
ADA, Title VII, the Family and Medical Leave Act, ERISA's fiduciary 
provisions, and State law. The Departments have not attempted to 
summarize the requirements of those laws in the HIPAA nondiscrimination 
rules. Instead, these rules clarify the application of the HIPAA 
nondiscrimination rules to group health plans, which may permit certain 
practices that other laws prohibit. Nonetheless, to avoid misleading 
plans and issuers as to the permissibility of any plan provision under 
other laws, the Departments included, in both paragraph (h) and 
paragraph (b) of the regulations, references to the potential 
applicability of other laws. Employers, plans, issuers, and other 
service providers should consider the applicability of these laws to 
their coverage and contact legal counsel or other government agencies 
such as the EEOC and State insurance departments if they have questions 
under those laws.

Source-of-Injury Exclusions

    Some plans and issuers, while generally providing coverage for the 
treatment of an injury, deny benefits if the injury arose from a 
specified cause or activity. These kinds of exclusions are known as 
source-of-injury exclusions. Under the 2001 interim rules, if a plan or 
issuer provides benefits for a particular injury, it may not deny 
benefits otherwise provided for treatment of the injury due to the fact 
that the injury results from a medical condition or an act of domestic 
violence. Two examples in the 2001 interim rules illustrate the 
application of this rule, to injuries resulting from an attempted 
suicide due to depression and to injuries resulting from bungee 
jumping.
    These final regulations retain the provisions in the 2001 interim 
rules and add a clarification. Some people have inquired if a suicide 
exclusion can apply if an individual had not been diagnosed with a 
medical condition such as depression before the suicide attempt. These 
final regulations clarify that benefits may not be denied for injuries 
resulting from a medical condition even if the medical condition was 
not diagnosed before the injury.
    Some comments expressed concern that the discussion of the source-
of-injury rule in the 2001 interim rules might be used to support the 
use of vague language to identify plan benefit exclusions, especially 
to identify source-of-injury exclusions. Requirements for plan benefit 
descriptions are generally outside of the scope of these regulations. 
Nonetheless, Department of Labor regulations at 29 CFR 2520.102-2(b) 
provide, ``The format of the summary plan description must not have the 
effect of misleading, misinforming or failing to inform participants 
and beneficiaries. Any description of exception, limitations, 
reductions, and other restrictions of plan benefits shall not be 
minimized, rendered obscure or otherwise made to appear unimportant * * 
* The advantages and disadvantages of the plan shall be presented 
without either exaggerating the benefits or minimizing the 
limitations.'' State laws governing group insurance or nonfederal 
governmental plans may provide additional protections.
    The Departments received thousands of comments protesting that the 
source-of-injury provisions in the 2001 interim rules would generally 
permit plans or issuers to exclude benefits for the treatment of 
injuries sustained in the activities listed in the conference report to 
HIPAA (motorcycling, snowmobiling, all-terrain vehicle riding, 
horseback riding, skiing, and other similar activities). Many comments 
requested that the source-of-injury rule be amended to provide that a 
source-of-injury exclusion could not apply if the

[[Page 75016]]

injury resulted from (in addition to an act of domestic violence or a 
medical condition) participation in legal recreational activities such 
as those listed in the conference report. Some comments expressed the 
concern that the rule in the 2001 interim rules would cause plans and 
issuers to begin excluding benefits for treatment of injuries sustained 
in these kinds of activities.
    One comment generally supported the position in the 2001 interim 
rules. That comment expressed the belief that Congress intended with 
this issue, as with many other issues, to continue its longstanding 
deference to the States on the regulation of benefit design under 
health insurance. The comment also noted that the source-of-injury rule 
in the 2001 interim rules would not change the practice of plans or 
issuers with regard to the activities listed in the conference report 
and that the practice of plans and issuers in this regard would 
continue to be governed, as they had been before HIPAA, by market 
conditions and the States.
    The Departments have not added the list of activities from the 
conference report to the source-of-injury rule in the final 
regulations. The statute itself is unclear about how benefits in 
general are affected by the nondiscrimination requirements and is 
silent with respect to source-of-injury exclusions in particular. The 
legislative history provides that the inclusion of evidence of 
insurability in the list of health factors is intended to ensure, among 
other things, that individuals are not excluded from health care 
coverage due to their participation in the activities listed in the 
conference report. This language is unclear because the term ``health 
care coverage'' could mean only eligibility to enroll for coverage 
under the plan, so that people who participate in the activities listed 
in the conference report could not be kept out of the plan but could be 
denied benefits for injuries sustained in those activities. 
Alternatively, it could mean eligibility both to enroll for coverage 
and for benefits, so that people who participate in those activities 
could not be kept out of the plan or denied benefits for injuries 
sustained in those activities. Without any indication in the statute 
and without a clear indication in the legislative history about this 
issue, and in light of the overall scheme of the statute, the 
Departments have made no changes to the regulations.
    Moreover, to the extent not prohibited by State law, plans and 
issuers have been free to impose source-of-injury exclusions since 
before HIPAA. There is no reason to believe that plans and issuers will 
begin to impose source-of-injury exclusions with respect to the 
conference report activities merely because such exclusions are not 
prohibited under the 2001 interim rules and these final regulations.

Relationship of Prohibition on Nonconfinement Clauses to State 
Extension-of-Benefits Laws

    Questions have arisen about the relationship of the prohibition on 
nonconfinement clauses in the 2001 interim rules to State extension-of-
benefits laws. Plan provisions that deny an individual benefits based 
on the individual's confinement to a hospital or other health care 
institution at the time coverage would otherwise become effective are 
often called nonconfinement clauses. The 2001 interim rules prohibit 
such nonconfinement clauses. At the same time, many States require 
issuers to provide benefits beyond the date on which coverage under the 
policy would otherwise have ended to individuals who continue to be 
hospitalized beyond that date. Example 2 in the 2001 interim rules 
illustrated that a current issuer cannot impose a nonconfinement clause 
that restricts benefits for an individual based on whether that 
individual is entitled to continued benefits from a prior issuer 
pursuant to a State law requirement. The final sentence in Example 2 
provided that HIPAA does not affect the prior issuer's obligation under 
State law and does not affect any State law governing coordination of 
benefits.
    Under the laws of some States, a prior issuer has the obligation to 
provide health benefits to an individual confined to a hospital beyond 
the nominal end of the policy only if the hospitalization is not 
covered by a succeeding issuer. Because HIPAA requires a succeeding 
issuer to provide benefits that it would otherwise provide if not for 
the nonconfinement clause, in such a case State law would not require 
the prior issuer to provide benefits for a confinement beyond the 
nominal end of the policy. In this context, the statement in the final 
sentence of Example 2--that HIPAA does not affect the prior issuer's 
obligation under State law--could be read to conflict with the text of 
the rule and the main point of Example 2 that the succeeding issuer 
must cover the confinement.
    There has been some dispute about how this potential ambiguity 
should be resolved. One interpretation is that the succeeding issuer 
can never impose a nonconfinement clause, and if this has the effect 
under State law of not requiring the prior issuer to provide benefits 
beyond the nominal end of the policy, then the prior issuer is not 
obligated to provide the extended benefits. This interpretation is 
consistent with the text of the nonconfinement rule and the main point 
of Example 2, though it could be read to conflict with the last 
sentence in Example 2.
    Another interpretation proposed by some is that, consistent with 
the last sentence of Example 2, the obligation of a prior issuer is 
never affected by the HIPAA prohibition against nonconfinement clauses. 
Under this interpretation, if a State law conditions a prior issuer's 
obligation on there being no succeeding issuer with the obligation, 
then in order to leave the prior issuer's obligation unaffected under 
State law, the succeeding issuer could apply a nonconfinement clause 
and the HIPAA prohibition would not apply. This interpretation elevates 
a minor clarification at the end of an example to supersede not only 
the main point of the example but also the express text of the rule the 
example illustrates. This proposed interpretation is clearly contrary 
to the intent of the 2001 interim rules.
    To avoid other interpretations, these final rules have replaced the 
final sentence of Example 2 in the 2001 interim rules with three 
sentences. The new language clarifies that: State law cannot change the 
succeeding issuer's obligation under HIPAA; a prior issuer may also 
have an obligation; and in a case in which a succeeding issuer has an 
obligation under HIPAA and a prior issuer has an obligation under State 
law to provide benefits for a confinement, any State laws designed to 
prevent more than 100 percent reimbursement, such as State 
coordination-of-benefits laws, continue to apply. Thus, under HIPAA a 
succeeding issuer cannot deny benefits to an individual on the basis of 
a nonconfinement clause. If this requirement under HIPAA has the effect 
under State law of removing a prior issuer's obligation to provide 
benefits, then the prior issuer is not obligated to provide benefits 
for the confinement. If under State law this requirement under HIPAA 
has the effect of obligating both the prior issuer and the succeeding 
issuer to provide benefits, then any State coordination-of-benefits law 
that is used to determine the order of payment and to prevent more than 
100 percent reimbursement continues to apply.

Actively-at-Work Rules and Employer Leave Policies

    The final regulations make no changes to the 2001 interim rules 
relating to actively-at-work provisions. Actively-at-

[[Page 75017]]

work clauses are generally prohibited, unless individuals who are 
absent from work due to any health factor are treated, for purposes of 
health coverage, as if they are actively at work. Nonetheless, a plan 
or issuer may distinguish between groups of similarly situated 
individuals (provided the distinction is not directed at individual 
participants or beneficiaries based on a health factor). Examples in 
the regulations illustrate that a plan or issuer may condition coverage 
on an individual's meeting the plan's requirement of working full-time 
(such as a minimum of 250 hours in a three-month period or 30 hours per 
week).
    Several members of the regulated community have asked the 
Departments to clarify the applicability of the actively-at-work rules 
to various plan provisions that require an individual to perform a 
minimum amount of service per week in order to be eligible for 
coverage. It is the Departments' experience that much of the complexity 
in applying these rules derives from the myriad variations in the 
operation of employers' leave policies. The Departments believe that 
the 2001 interim rules provide adequate principles for applying the 
actively-at-work provisions to different types of eligibility 
provisions. In order to comply with these rules, a plan or issuer 
should apply the plan's service requirements consistently to all 
similarly situated employees eligible for coverage under the plan 
without regard to whether an employee is seeking eligibility to enroll 
in the plan or continued eligibility to remain in the plan. 
Accordingly, if a plan imposes a 30-hour-per-week requirement and 
treats employees on paid leave (including sick leave and vacation 
leave) who are already in the plan as if they are actively-at-work, the 
plan generally is required to credit time on paid leave towards 
satisfying the 30-hour-per-week requirement for employees seeking 
enrollment in the plan. Similarly, if a plan allowed employees to 
continue eligibility under the plan while on paid leave and for an 
additional period of 30 days while on unpaid leave, the plan is 
generally required to credit these same periods for employees seeking 
enrollment in the plan.\1\ To help ensure consistency in application, 
plans and issuers may wish to clarify, in writing, how employees on 
various types of leave are treated for purposes of interpreting a 
service requirement. Without clear plan rules, plans and issuers might 
slip into inconsistent applications of their rules, which could lead to 
violations of the actively-at-work provisions.
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    \1\ These nondiscrimination rules do not address the 
applicability of the Family and Medical Leave Act to employers or 
group health coverage.
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Wellness Programs

    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. The 1997 interim 
rules refer to these programs as ``bona fide wellness programs.'' In 
the preamble to the 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 their intent to issue 
further regulations on the nondiscrimination requirements 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 publication of additional guidance. The preambles to the 
2001 interim final and proposed rules noted that the period for 
nonenforcement in cases of good faith compliance with the HIPAA 
nondiscrimination provisions generally ended on the applicability date 
of those regulations but continued with respect to wellness programs 
until the issuance of further guidance. Accordingly, the nonenforcement 
policy of the Departments ends upon the applicability date of these 
final regulations for cases in which a plan or issuer fails to comply 
with the regulations but complies in good faith with an otherwise 
reasonable interpretation of the statute.
    The HIPAA nondiscrimination provisions generally prohibit a plan or 
issuer from charging similarly situated individuals different premiums 
or contributions based on a health factor. These final regulations also 
generally prohibit a plan or issuer from requiring similarly situated 
individuals to satisfy differing deductible, copayment, or other cost-
sharing requirements. 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.
    Both the 1997 interim rules and the 2001 proposed regulations refer 
to programs of health promotion and disease prevention allowed under 
this exception as ``bona fide wellness programs.'' These regulations 
generally adopt the provisions in the 2001 proposed rules. However, as 
more fully explained below, the final regulations no longer use the 
term ``bona fide'' in connection with wellness programs, add a 
description of wellness programs that do not have to satisfy additional 
requirements in order to comply with the nondiscrimination 
requirements, reorganize the four requirements from the proposed rules 
into five requirements, provide that the reward for a wellness 
program--coupled with the reward for other wellness programs with 
respect to the plan that require satisfaction of a standard related to 
a health factor--must not exceed 20% of the total cost of coverage 
under the plan, and add examples and make other changes to more 
accurately describe how the requirements apply.
    The term ``wellness program''. Comments suggested that the use of 
the term ``bona fide'' with respect to wellness programs was confusing 
because, under the proposed rules, some wellness programs that are not 
``bona fide'' within the narrow meaning of that term in the proposed 
rules nonetheless satisfy the HIPAA nondiscrimination requirements. To 
address this concern, these final regulations do not use the term 
``bona fide wellness program.'' Instead the final regulations treat all 
programs of health promotion or disease prevention as wellness programs 
and specify which of those wellness programs must satisfy additional 
standards to comply with the nondiscrimination requirements.
    Programs not subject to additional standards. The preamble to the 
2001 proposed rules described a number of wellness programs that comply 
with the HIPAA nondiscrimination requirements without having to satisfy 
any additional standards. However, the text of the regulation did not 
make such a distinction. The Departments have received many comments 
and inquiries about whether programs like those described in the 2001 
preamble would have to satisfy the additional standards in the proposed 
rules. As a result, a paragraph has been added to the final regulations 
defining and illustrating programs that comply with the 
nondiscrimination requirements without having to satisfy any additional

[[Page 75018]]

standards (assuming participation in the program is made available to 
all similarly situated individuals). Such programs are those under 
which none of the conditions for obtaining a reward is based on an 
individual satisfying a standard related to a health factor or under 
which no reward is offered. The final regulations include the following 
list to illustrate the wide range of programs that would not have to 
satisfy any additional standards to comply with the nondiscrimination 
requirements:
     A program that reimburses all or part of the cost for 
memberships in a fitness center.
     A diagnostic testing program that provides a reward for 
participation and does not base any part of the reward on outcomes.
     A program that encourages preventive care through the 
waiver of the copayment or deductible requirement under a group health 
plan for the costs of, for example, prenatal care or well-baby visits.
     A program that reimburses employees for the costs of 
smoking cessation programs without regard to whether the employee quits 
smoking.
     A program that provides a reward to employees for 
attending a monthly health education seminar.
    Only programs under which any of the conditions for obtaining a 
reward is based on an individual satisfying a standard related to a 
health factor must meet the five additional requirements described in 
paragraph (f)(2) of these regulations in order to comply with the 
nondiscrimination requirements.
    Limit on the reward. As under the proposed rules, 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 or 
rebate of a premium or contribution, a waiver of all or part of a cost-
sharing mechanism (such as deductibles, copayments, or coinsurance), 
the absence of a surcharge, or the value of a benefit that would 
otherwise not be provided under the plan. Under the proposed rule, 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.
    Comments indicated that in some circumstances dependents are 
permitted to participate in the wellness program in addition to the 
employee and that in those circumstances the reward should be higher to 
reflect dependent participation in the program. These final regulations 
provide that if, in addition to employees, any class of dependents 
(such as spouses or spouses and dependent children) may participate in 
the wellness program, the limit on the reward is based on the cost of 
the coverage category in which the employee and any dependents are 
enrolled.
    The proposed regulations specified three alternative percentages: 
10, 15, and 20. The final regulations provide that the amount of the 
reward may not exceed 20 percent of the cost of coverage. The proposed 
regulations solicited comments on the appropriate percentage. The 
percentage limit is designed to avoid a reward or penalty being so 
large as to have the effect of denying coverage or creating too heavy a 
financial penalty on individuals who do not satisfy an initial wellness 
program standard that is related to a health factor. Comments from one 
employer and two national insurance industry associations requested 
that the level of the percentage for rewards should provide plans and 
issuers maximum flexibility for designing wellness programs. Comments 
suggested that plans and issuers have a greater opportunity to 
encourage healthy behaviors through programs of health promotion and 
disease prevention if they are allowed flexibility in designing such 
programs. The 20 percent limit on the size of the reward in the final 
regulations allows plans and issuers to maintain flexibility in their 
ability to design wellness programs, while avoiding rewards or 
penalties so large as to deny coverage or create too heavy a financial 
penalty on individuals who do not satisfy an initial wellness program 
standard that is related to a health factor.
    Reasonably-designed and at-least-once-per-year requirements. In the 
2001 proposed rules, the second of four requirements was that the 
program must be reasonably designed to promote good health or prevent 
disease. The regulations also provided that a program did not meet this 
standard unless it gave individuals eligible for the program the 
opportunity to qualify for the reward at least once per year.
    One comment suggested a safe harbor under which a wellness program 
that allows individuals to qualify at least once a year for the reward 
under the program would satisfy the ``reasonably designed'' standard 
without regard to other attributes of the program. The Departments have 
not adopted this suggestion. The ``reasonably designed'' standard is a 
broad standard. A wide range of factors could affect the reasonableness 
of the design of a wellness program, not just the frequency with which 
a participant could qualify for the reward. For example, a program 
might not be reasonably designed to promote good health or prevent 
disease if it imposed, as a condition to obtaining the reward, an 
overly burdensome time commitment or a requirement to engage in illegal 
behavior. The once-per-year requirement was included in the proposed 
rules merely as a bright-line standard for determining the minimum 
frequency that is consistent with a reasonable design for promoting 
good health or preventing disease. Thus, this second requirement of the 
proposed rules has been divided into two requirements in the final 
rules (the second and the third requirements). This division was made 
to emphasize that a program that must satisfy the additional standards 
in order to comply with the nondiscrimination requirements must allow 
eligible individuals to qualify for the reward at least once per year 
and must also be otherwise reasonably designed to promote health or 
prevent disease.
    Comments also expressed other concerns about the ``reasonably 
designed'' requirement. While acknowledging that this standard provides 
significant flexibility, these comments were concerned that this 
flexible approach might also require substantial resources in 
evaluating all the facts and circumstances of a proposed program to 
determine whether it was reasonable in its design.
    The ``reasonably designed'' requirement is intended to be an easy 
standard to satisfy. To make this clear, the final regulations have 
added language providing that if a program has a reasonable chance of 
improving the health of participants and it is not overly burdensome, 
is not a subterfuge for discriminating based on a health factor, and is 
not highly suspect in the method chosen to promote health or prevent 
disease, it satisfies this standard. There does not need to be a 
scientific record that the method promotes wellness to satisfy this 
standard. The standard is intended to allow experimentation in diverse 
ways of promoting wellness. For example, a plan or issuer could satisfy 
this standard by providing rewards to individuals who participated in a 
course of aromatherapy. The requirement of reasonableness in this 
standard prohibits bizarre, extreme, or illegal requirements in a 
wellness program.

[[Page 75019]]

    One comment requested that the final regulations set forth one or 
more safe harbors that would demonstrate compliance with the 
``reasonably designed'' standard. The examples in the proposed and 
final regulations present a range of wellness programs that are well 
within the borders of what is considered reasonably designed to promote 
health or prevent disease. The examples serve as safe harbors, so that 
a plan or issuer could adopt a program identical to one described as 
satisfying the wellness program requirements in the examples and be 
assured of satisfying the requirements in the regulations. Wellness 
programs similar to the examples also would satisfy the ``reasonably 
designed'' requirement. The Departments, though, do not want plans or 
issuers to feel constrained by the relatively narrow range of programs 
described by the examples but want plans and issuers to feel free to 
consider innovative programs for motivating individuals to make efforts 
to improve their health.
    Reasonable alternative standard. Under the 2001 proposed rules and 
these final regulations, a wellness program that provides a reward 
requiring satisfaction of a standard related to a health factor must 
provide a reasonable alternative standard for obtaining the reward for 
certain individuals. This alternative standard must be available for 
individuals for whom, for that period, it is unreasonably difficult due 
to a medical condition to satisfy the otherwise applicable standard, or 
for whom, for that period, it is medically inadvisable to attempt to 
satisfy the otherwise applicable standard. A program does not need to 
establish the specific reasonable alternative standard before the 
program commences. 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.
    Some comments suggested that the requirement to devise and offer 
such a reasonable alternative standard potentially creates a 
significant burden on plans and issuers. Comments also suggested that 
the Departments should define a ``safe harbor'' for what constitutes a 
reasonable alternative standard, and that plans and issuers should be 
permitted to establish a single alternative standard, rather than 
having to tailor a standard for each individual for whom a reasonable 
alternative standard must be offered.
    The Departments understand that, in devising wellness programs, 
plans and issuers strive to improve the health of participating 
individuals in a way that is not administratively burdensome or 
expensive. Under the proposed and final rules, it is permissible for a 
plan or issuer to devise a reasonable alternative standard by lowering 
the threshold of the existing health-factor-related standard, 
substituting a different standard, or waiving the standard. (For the 
alternative standard to be reasonable, the individual must be able to 
satisfy it without regard to any health factor.) To address the concern 
regarding the potential burden of this requirement, the final 
regulations explicitly provide that a plan or issuer can waive the 
health-factor-related standard for all individuals for whom a 
reasonable alternative standard must be offered. Additionally, the 
final regulations include an example demonstrating that a reasonable 
alternative standard could include following the recommendations of an 
individual's physician regarding the health factor at issue. Thus, a 
plan or issuer need not assume the burden of designing a discrete 
alternative standard for each individual for whom an alternative 
standard must be offered. An example also illustrates that if an 
alternative standard is health-factor-related (i.e., walking three days 
a week for 20 minutes a day), the wellness program must provide an 
additional alternative standard (i.e., following the individual's 
physician's recommendations regarding the health factor at issue) to 
the appropriate individuals.
    The 2001 proposed rules included an example illustrating a smoking 
cessation program. Comments expressed concern that, under the proposed 
regulations, individuals addicted to nicotine who comply with a 
reasonable alternative standard year after year would always be 
entitled to the reward even if they did not quit using tobacco. 
Comments questioned whether this result is consistent with the goal of 
promoting wellness. The final regulations retain the example from the 
proposed rules. Comments noted that overcoming an addiction sometimes 
requires a cycle of failure and renewed effort. For those individuals 
for whom it remains unreasonably difficult due to an addiction, a 
reasonable alternative standard must continue to be offered. Plans and 
issuers can accommodate this health factor by continuing to offer the 
same or a new reasonable alternative standard. For example, a plan or 
issuer using a smoking cessation class might use different classes from 
year to year or might change from using a class to providing nicotine 
replacement therapy. These final regulations provide an additional 
example of a reasonable alternative standard of viewing, over a period 
of 12 months, a 12-hour video series on health problems associated with 
tobacco use.
    Concern has been expressed that individuals might claim that it 
would be unreasonably difficult or medically inadvisable to meet the 
wellness program standard, when in fact the individual could meet the 
standard. The final rules clarify that plans may seek verification, 
such as a statement from a physician, that a health factor makes it 
unreasonably difficult or medically inadvisable for an individual to 
meet a standard.
    Disclosure requirements. The fifth requirement for a wellness 
program that provides a reward requiring satisfaction of a standard 
related to a health factor is that all plan materials describing the 
terms of the program must disclose the availability of a reasonable 
alternative standard. This requirement is unchanged from the proposed 
rules. The 2001 proposed rules and these final regulations include the 
same model language that can be used to satisfy this requirement; 
examples also illustrate substantially similar language that would 
satisfy the requirement.
    The final regulations retain the two clarifications of this 
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.

Special Rule for Self-Funded Nonfederal Governmental Plans Exempted 
Under 45 CFR 146.180

    The sponsor of a self-funded nonfederal governmental plan may elect 
under section 2721(b)(2) of the PHS Act and 45 CFR 146.180 to exempt 
its group health plan from the nondiscrimination requirements of 
section 2702 of the PHS Act and 45 CFR 146.121. Under the interim final 
nondiscrimination rules, if the plan sponsor subsequently chooses to 
bring the plan into compliance with the nondiscrimination requirements, 
the plan must provide notice to that effect to individuals who were 
denied

[[Page 75020]]

enrollment based on one or more health factors, and afford those 
individuals an opportunity, that continues for at least 30 days, to 
enroll in the plan. (An individual is considered to have been denied 
coverage if he or she failed to apply for coverage because, given an 
exemption election under 45 CFR 146.180, it was reasonable to believe 
that an application for coverage would have been denied based on a 
health factor). The notice must specify the effective date of 
compliance, and inform the individual regarding any enrollment 
restrictions that may apply under the terms of the plan once the plan 
comes into compliance. The plan may not treat the individual as a late 
enrollee or a special enrollee. These final regulations retain this 
transitional rule, and state that the plan must permit coverage to be 
effective as of the first day of plan coverage for which an exemption 
election under 45 CFR 146.180 (with regard to the nondiscrimination 
requirements) is no longer in effect. (These final regulations delete 
the reference giving the plan the option of having the coverage start 
July 1, 2001, because that option implicated the expired transitional 
rules regarding individuals who were denied coverage based on a health 
factor prior to the applicability of the 2001 interim rules. As 
previously stated, those transitional rules have not been republished 
in these final regulations.) Additionally, the examples illustrating 
how the special rule for nonfederal governmental plans operates have 
been revised slightly.

Applicability Date

    These regulations apply for plan years beginning on or after July 
1, 2007. Until the applicability date for this regulation, plans and 
issuers are required to comply with the corresponding sections of the 
regulations previously published in the Federal Register (66 FR 1378) 
and other applicable regulations.

III. Economic Impact and Paperwork Burden

Summary--Department of Labor and Department of Health and Human 
Services

    HIPAA's nondiscrimination provisions generally prohibit group 
health plans and group health insurance issuers from discriminating 
against individuals in eligibility or premiums on the basis of health 
factors. The Departments have crafted these regulations to secure the 
protections from discrimination as intended by Congress in as 
economically efficient a manner as possible, and believe that the 
economic benefits of the regulations justify their costs.
    The primary economic benefits associated with securing HIPAA's 
nondiscrimination provisions derive from increased access to affordable 
group health plan coverage for individuals with health problems. 
Increased access benefits both newly-covered individuals and society at 
large. It fosters expanded health coverage, timelier and more complete 
medical care, better health outcomes, and improved productivity and 
quality of life. This is especially true for the individuals most 
affected by HIPAA's nondiscrimination provisions--those with adverse 
health conditions. Denied health coverage, individuals in poorer health 
are more likely to suffer economic hardship, to forego badly needed 
care for financial reasons, and to suffer adverse health outcomes as a 
result. For them, gaining health coverage is more likely to mean 
gaining economic security, receiving timely, quality care, and living 
healthier, more productive lives. Similarly, participation by these 
individuals in wellness programs fosters better health outcomes, 
increases productivity and quality of life, and has the same outcome in 
terms of overall gains in economic security. The wellness provisions of 
these regulations will result in fewer instances in which wellness 
programs shift costs to high-risk individuals, and more instances in 
which these individuals succeed at improving health habits and health.
    Additional economic benefits derive directly from the improved 
clarity provided by the regulations. The regulations will reduce 
uncertainty and costly disputes and promote confidence in health 
benefits' value, thereby improving labor market efficiency and 
fostering the establishment and continuation of group health plans and 
their wellness program provisions.
    The Departments estimate that the dollar value of the expanded 
coverage attributable to HIPAA's nondiscrimination provisions is 
approximately $850 million annually. The Departments believe that the 
cost of HIPAA's nondiscrimination provisions is borne by covered 
workers. Costs can be shifted to workers through increases in employee 
premium shares or reductions (or smaller increases) in pay or other 
components of compensation, by increases in deductibles or other cost 
sharing, or by reducing the richness of health benefits. Whereas the 
benefits of the nondiscrimination provisions are concentrated in a 
relatively small population, the costs are distributed broadly across 
plans and enrollees.
    The proposed rules on wellness programs impose certain requirements 
on wellness programs providing rewards that would otherwise 
discriminate based on a health factor in order to ensure that the 
exception for wellness programs does not eviscerate the general rule 
contained in HIPAA's nondiscrimination provisions. Costs associated 
with the wellness program provisions are justified by the benefits 
received by those individuals now able, through alternative standards, 
to participate in such programs. Because the new provisions limit 
rewards for wellness programs that require an individual to satisfy a 
standard related to a health factor to 20 percent of the cost of single 
coverage (with additional provisions related to rewards that apply also 
to classes of dependents), some rewards will be reduced and this 
reduction might compel some individuals to decline coverage. The number 
of individuals affected, however, is thought to be small. Moreover, the 
Departments estimate that the cost of the reduction in rewards that 
would exceed the limit will amount to only $6 million. Establishing 
reasonable alternative standards, which should increase coverage for 
those now eligible for discounts as well as their participation in 
programs designed to promote health or prevent disease, is expected to 
cost between $2 million to $9 million. The total costs should therefore 
fall within a range between $8 million and $15 million annually.
    New economic costs may be also incurred in connection with the 
wellness provisions if reductions in rewards result in the reduction of 
wellness programs' effectiveness, but this effect is expected to be 
very small. Other new economic costs may be incurred by plan sponsors 
to make available reasonable alternative standards where required. The 
Departments are unable to estimate these costs due to the variety of 
options available to plan sponsors for bringing wellness programs into 
compliance with these rules.

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

    Under Executive Order 12866, the Departments must determine whether 
a regulatory action is ``significant'' and therefore subject to the 
requirements of the Executive Order and subject to review by the Office 
of Management and Budget (OMB). Under section 3(f), the order defines a 
``significant regulatory action'' as an action that is likely to result 
in a rule (1) having an annual effect on the economy of $100 million

[[Page 75021]]

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, this action is 
``economically significant'' and subject to OMB review under Section 
3(f) of the Executive Order. Consistent with the Executive Order, the 
Departments have assessed the costs and benefits of this regulatory 
action. The Departments performed a comprehensive, unified analysis to 
estimate the costs and benefits attributable to the final regulations 
for purposes of compliance with the Executive Order 12866, the 
Regulatory Flexibility Act, and the Paperwork Reduction Act. The 
Departments' analyses and underlying assumptions are detailed below. 
The Departments believe that the benefits of the final regulations 
justify their costs.

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 likely to have 
a significant economic impact on a substantial number of small 
entities. Unless an agency certifies that a final rule will not have a 
significant economic impact on a substantial number of small entities, 
section 604 of the RFA requires that the agency present a final 
regulatory flexibility analysis (FRFA) at the time of the publication 
of the notice of final rulemaking describing the impact of the rule on 
small entities. Small entities include small businesses, organizations, 
and governmental jurisdictions.
    Because the 2001 interim rules were issued as final rules and not 
as a notice of proposed rulemaking, the RFA did not apply and the 
Departments were not required to either certify that the rule would not 
have a significant impact on a substantial number of small entities or 
conduct a regulatory flexibility analysis. The Departments nonetheless 
crafted those regulations in careful consideration of effects on small 
entities, and conducted an analysis of the likely impact of the rules 
on small entities. This analysis was detailed in the preamble to the 
interim final rule.
    The Departments also conducted an initial regulatory flexibility 
analysis in connection with the proposed regulations on wellness 
programs and present here a FRFA with respect to the final regulations 
on wellness programs pursuant to section 604 of the RFA. For purposes 
of their unified FRFA, the Departments adhered to EBSA's proposed 
definition of small entities. The Departments 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 ERISA, which 
permits the Secretary of Labor to prescribe simplified annual reports 
for pension plans that cover fewer than 100 participants. The 
Departments believe that assessing the impact of this final rule on 
small plans is an appropriate substitute for evaluating the effect on 
small entities as that term is defined in the RFA. This definition of 
small entity differs, however, from the definition of small business 
based on standards promulgated by the Small Business Administration (13 
CFR 121.201) pursuant to the Small Business Act (15 U.S.C. 631 et 
seq.). Because of this difference, the Departments requested comments 
on the appropriateness of this size standard for evaluating the impact 
of the proposed regulations on small entities. No comments were 
received.
    The Departments estimate that 35,000 plans with fewer than 100 
participants vary employee premium contributions or cost-sharing across 
similarly situated individuals based on health factors.\2\ While this 
represents just one percent of all small plans, the Departments believe 
that because of the large number of plans, this may constitute a 
substantial number of small entities. The Departments also note that at 
least some premium rewards may be large. Premium discounts associated 
with wellness programs are believed to range as high as $920 per 
affected participant per year. Therefore, the Departments believe that 
the impact of this regulation on at least some small entities may be 
significant.
---------------------------------------------------------------------------

    \2\ Based on tabulations of the 2003 Medical Expenditure Panel 
Survey Insurance Component (MEPS-IC) and 1997 Survey of Government 
Finances (SGF), the Departments estimate that roughly 2.4 million 
small health plans exist. Of these, 1.2 percent of these plans are 
believed to vary premiums (as suggested in a 1993 study by the 
Robert Woods Johnson Foundation) while .5 percent are thought to 
vary benefits (as suggested in, Spec Summary. United States Salaried 
Managed Health/Health Promotion Initiatives, 2003-2004, Hewitt 
Associates, July, 2003.). Assuming that half of those that vary 
premiums also vary benefits, the Departments conclude that 1.5 
percent of all small plans are potentially affected by the statute.
---------------------------------------------------------------------------

    Under these final regulations on wellness programs, such programs 
are not subject to additional requirements if none of the conditions 
for obtaining a reward is based on an individual satisfying a standard 
that is related to a health factor (or if a wellness program does not 
provide a reward).
    Where a condition for obtaining a reward is based on an individual 
satisfying a standard related to a health factor, the wellness program 
will not violate the nondiscrimination provisions if additional 
requirements are met. The first requirement limits the maximum 
allowable reward or total of rewards to a maximum of 20 percent of the 
cost of employee-only coverage under the plan (with additional 
provisions related to rewards that apply also to classes of 
dependents). The magnitude of the limit is intended to offer plans 
maximum flexibility while avoiding the effect of denying coverage or 
creating an excessive financial penalty for individuals who cannot 
satisfy the initial standard based on a health factor.
    The Departments estimate that 4,000 small plans and 22,000 small 
plan participants will be affected by this limit.\3\ These plans can 
comply with this requirement by reducing the discount to the regulated 
maximum. This will result in an increase in premiums (or decrease in 
cost-sharing) by about $1.3 million on aggregate for those participants 
receiving qualified premium discounts \4\ This constitutes an ongoing, 
annual cost of $338 on average per affected plan. The regulation does 
not limit small plans' flexibility to shift this cost to all 
participants in the form

[[Page 75022]]

of small premium increases or benefit cuts.
---------------------------------------------------------------------------

    \3\ Simulations run by the Departments suggest that 10.7 percent 
of all plans exceed the capped premium discount. For the purposes of 
this analysis, it was assumed that the affected plans were 
proportionally distributed between large and small plans. However, 
it is likely that larger plans would have more generous welfare 
programs and therefore, this estimate is likely an upper bound.
    \4\ Estimate is based on the 2003-04 Hewitt Study and various 
measures of the general health of the labor force suggest that 
roughly 30 percent of health plan participants will not qualify for 
the discount. While plans exceeding the capped discount could meet 
the statutes requirements by transferring the excess amount, on 
average $57, to the non-qualifying participants, given current 
trends in the health insurance industry, it is considered more 
likely that plans would instead lower the amount of the discount 
given to the 70 percent of participants that qualify. This transfer 
would roughly total $1.3 million dollars.
---------------------------------------------------------------------------

    The 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.
    The third requirement is that the program give individuals eligible 
for the program the opportunity to qualify for the reward at least once 
per year. This provision was included within the terms of the 
requirements for reasonable design in the proposed regulations. The 
Departments did not anticipate that a cost would arise from the 
requirements related to reasonable design when taken together, but 
requested comments on their assumptions. Because no comments were 
received, the Departments have not attributed a cost to this provision 
of the final rule.
    The fourth requirement provides that rewards under wellness 
programs must be available to all similarly situated individuals. 
Rewards are not available to similarly situated individuals unless a 
program allows a reasonable alternative standard or waiver of the 
applicable standard, if it is unreasonably difficult due to a medical 
condition or medically inadvisable to attempt to satisfy the otherwise 
applicable standard. 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 3,000 small plans' wellness programs 
include initial standards that may be unreasonably difficult due to a 
medical condition or medically inadvisable for some participants to 
meet.\5\ These plans are estimated to include 4,000 participants for 
whom the standard is in fact unreasonably difficult due to a medical 
condition or medically inadvisable to meet.\6\ Satisfaction of 
alternative standards by these participants will result in cost 
increases for plans as these individuals qualify for discounts or avoid 
surcharges. If all of these participants request and then satisfy an 
alternative standard, the cost would amount to about $2 million 
annually. If one-half request alternative standards and one-half of 
those meet them, the cost would be $0.5 million.\7\
---------------------------------------------------------------------------

    \5\ The 2003-04 Hewitt Survey finds that 9 percent of its 
respondents require participants to achieve a certain health 
standard to be eligible for discounts. Based on assumptions about 
the general health of the labor force, approximately 2.3 percent of 
health plan participants may and 1.5 percent will find these 
standards difficult to achieve.
    \6\ Many small plans are very small, having fewer than 10 
participants. Hence, many small plans will include no participant 
for whom either of these st