Tobacco surcharges done right reduce litigation risk 

Grabbing headlines recently is a growing number of proposed class action lawsuits against employer group health plan sponsors (mostly self-funded) for allegedly wrongfully imposing tobacco-use surcharges on employee premiums or contributions. In all of these cases – at least 13 filed in just the last 6 weeks – employees who use tobacco (smoke, vape or chew) pay higher health plan premiums than similarly situated non-users. Premium differentials based on tobacco-use status is okay, as long as the HIPAA nondiscrimination rules for health-contingent, outcomes-based wellness programs are followed. Unfortunately, according to the allegations made in these complaints, these employer plan sponsors missed a few of the major requirements.

Enacted in 1996, HIPAA bans group health plans and health insurers from discriminating in eligibility, benefits, premiums, or contributions because of an enrollees’ medical condition or other health factor. In this context, tobacco use (that is, nicotine addiction) is a health factor. There are, however, two major exceptions: one for benign discrimination and another for wellness programs meeting certain conditions. It’s the wellness program rules that allow employers to differentiate employee premium based on tobacco use, but only if all of the following five requirements are met:

1. Plan participants must have an opportunity to qualify for the incentive (i.e., avoid the tobacco surcharge) at least once per year.
2. Incentives tied to tobacco use can’t exceed 50% of the total cost of coverage; other health-contingent incentives can’t exceed 30% of the total cost of coverage. For this purpose, the total cost of coverage includes both employer and employee contributions.
3. The wellness program must be reasonably designed to promote health or prevent disease and can’t be overly burdensome (i.e., it can’t be a cover for discriminating based on a health factor).
4. A reasonable alternative standard for obtaining the full reward must be available to participants who don’t meet the initial health standard (or a waiver of the initial standard must be available). For example, if the health standard is being a nonsmoker, then a RAS (e.g., completion of a smoking cessation program) must be available for smokers.
5. The RAS must be disclosed in all plan materials describing the wellness program, along with contact information for more information about the RAS.

Employers can find themselves in trouble if they implement a tobacco-use surcharge and don’t satisfy all five conditions required to avoid running afoul of HIPAA’s ban on discrimination based on a health factor. Common pitfalls include compliance with the fine print in the rule around incentives and the RAS requirement.

The bottom line is that health-contingent wellness programs must provide all similarly situated individuals a chance to receive the full program reward (or avoid the full program penalty) each year. That means reframing a tobacco surcharge as a tobacco-cessation program with free and accessible quit tools as the RAS (for example, counseling sessions and three or six months of nicotine patches). In addition, plan members must be given a reasonable amount of time to complete the RAS, and once completed, must be reimbursed (or otherwise made whole for) any surcharges incurred since the beginning of the plan year.

When administered correctly, a tobacco-using plan member who completes a RAS will pay no more in premiums for the year than non-tobacco-users. This is true, for example, even when a plan member is still using tobacco after the competition of a tobacco-cessation program. In order to avoid the tobacco surcharge, the plan member need only complete the RAS – actually becoming a nonsmoker isn’t required. Lastly, don’t hide the RAS. Be sure plan materials describing the wellness program clearly identify the RAS and timing for completion (model available here).