Pennsylvania Employment Lawyer & Attorney : Russell Krafft & Gruber Law Firm : Lancaster, York, Harrisburg

The EEOC issued final regulations that create a specific exemption from the Age discrimination laws (ADEA) allowing employers to coordinate (meaning alter, reduce or eliminate) health benefits for retirees who become eligible for Medicare. The EEOC regulations describe the exemption as follows:

Some employee benefit plans provide health benefits for retired participants that are altered, reduced or eliminated when the participant is eligible for Medicare health benefits or for health benefits under a comparable State health benefit plan, whether or not the participant actually enrolls in the other benefit program. Pursuant to the authority contained in section 9 of the Act and in accordance with the procedures provided therein and in Sec. 1625.30(b) of this part, it is hereby found necessary and proper in the public interest to exempt from all prohibitions of the Act such coordination of retiree health benefits with Medicare or a comparable State health benefit plan.

According to the NY Times, 10 million retirees rely on employer-sponsored health plans as their primary source of coverage or as a supplement to Medicare. With the rising cost of healthcare, many employers were considering the elimination of retiree benefits. The motivation for employers to eliminate retiree health coverage was greatly increased following a ruling by the Third Circuit Court of Appeals in 2000. In its decision in Erie County Retirees Association v. County of Erie, the Court held that the ADEA required that health benefits offered to Medicare-eligible retirees must be the same, or have the same cost to the employer, as benefits offered to employees under age 65. The ruling prohibited an employer from taking into account Medicare coverage in providing health benefits to retirees. Employers scrambled to justify plan designs that almost universally coordinated with Medicare.

In 2004, the EEOC issued proposed regulations that created an exemption in response to the Erie County decision. The American Association of Retired Persons (AARP) filed suit and won an injunction barring the EEOC from implementing the exemption. On appeal, the same Third Circuit Court of Appeals that decided Erie County ruled that the EEOC had properly issued the exemption under its authority in the ADEA. AARP has sought an appeal to the US Supreme Court.

The EEOC exemption gives employers an important cost control option in designing retiree health benefit programs. Barring an unexpected ruling by the U.S. Supreme Court, the uncertainty created in this area should subside.

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BusinessWeek reports that the California State Assembly passed a major health care reform plan that would expand coverage to almost 70% of the state’s uninsured at a cost of $14.4 billion. Under the Governor’s proposal, everyone would be require to buy minimum health insurance coverage. Insurers could not deny coverage based on age or medical condition and would be required to spend 85% of premium dollars on actual patient care. Revenue to fund the reform would come from taxes on hospitals, cigarettes and employers who do not provide a minimum level of health insurance.

Pennsylvania’s Governor has a similar Health Care Reform Act, the highlights of which are as follows:

• Establishes a basic health insurance program for employees of small low-wage employers and uninsured adult individuals, without waiting periods and pre-existing condition exclusions
• Creates a “Fair Share Tax” on all employers equal to 3% of payroll through 2010 and increasing to 3.5% thereafter.
• Provides for a small employer tax credit for first 5 years
• Provides a tax credit for all employers that offer a minimum level of coverage to all employees who work 30 or more hours per week based on the out of pocket cost to the employee and level of employee participation
• Requires insurers offering small group plans to:

• use modified community rating in setting rates taking into account only age, geographic region, and family composition
• vary rates by a factor no greater than 33%
• maintain a medical loss ratio of no less than 85%

These reforms are coming and they will impact employers by mandating a level of minimum coverage for employees and by taxes those employers who don’t offer coverage. Keep tabs on Pennsylvania’s Health Care Reform at the Governor’s website dedicated to this project.

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Rising costs have motivated many employers to adopt High Deductible Health Plans (HDHP) increasing the amount paid by employees for health care coverage. The Towers Perrin 2008 Health Care Cost Survey notes that employees are responsible for 22% of the cost of coverage or about $2000 per employee plus the cost of deductibles and co-pays. The average out of pocket expense for an employee is has doubled in the last 5 years.

Employers face employee relations challenges when attempting to pass along the out of pocket increases to employees without offering some funding assistance on either a transitional or ongoing basis. There is a significant learning curve for many of the accounts both in terms of evaluating the amount of employee/employer contributions and navigating the claims/reimbursement process.

Several options exist for employers to bridge the funding gap created by migrating to a HDHP from a more traditional indemnity arrangement including the following:

Health Savings Accounts (HSA) HSAs can be funded by both voluntary tax deductible employee contributions and/or tax exempt employer contributions allowing the combination of employer employee contributions to fully fund the deductible (up to the IRS limit). The contributions remain in the HSA and accumulate interest on a tax free basis. Distributions are tax free as long as the funds are used for Qualified Medical Expenses. An HSA may be moved to successive employers or used in retirement. The advantages or an HSA are portability; tax-free contributions, accumulations, and distributions; ownership of the account by the employee. The disadvantages of HSAs are that they can only be used with a HDHP; must be uniformly funded by employers; may discourage employees from seeking medical treatment; and are limited in their use with other types of accounts like FSAs and HRAs. Other problems have been identified in a previous post.

Medical Savings Accounts (MSA) MSAs may be established by self-employed individuals or employees of small employers (less than 50). The MSA is a tax exempt trust held by a financial institution and operates like an HSA.  Employers may contribute to an Archer MSA, but if they do, the employee may not contribute for that year. Contributions are limited to 75% of the annual HDHP deductible. Employers must make uniform contributions to their employees if they choose to contribute. The additional advantage of an MSA is that it may be established by an employee without employer sponsorship.

Flexible Spending Accounts (FSA)  Employees may contribute to an FSA on a pre-tax basis as part of an employer sponsored cafeteria plan. Both employers and employees can contribute to an FSA.      FSAs fund Qualified Medical Expenses, except health insurance premiums and long term care expenses. The big disadvantage of an FSA is that any money remaining in the account that is not used to reimburse expenses is forfeited. There is no accumulation of money in the account from one year to the next.

Health Reimbursement Arrangements (HRA) HRAs may only be funded by employers on a uniform basis for all participating employees. Employees may not contribute. There are no limits on the amount of employer contributions, but HRA funds may only be used for Qualified Medical Expenses which include health insurance premiums. HRA contributions are tax free and unused amounts may be carried over to subsequent years. HRAs are not portable and do not accumulate earnings on account balances. They compare favorably with FSA because there is no use it or lose it. An employer may offer both an HRA and FSA, but there are complex ordering rules coordinating the interaction of FSA and HRA payments and prohibitions on funding the HRA with FSA contributions.

Combined Accounts (MSA, HRA and FSA)   It is possible, but complex, to offer multiple arrangements in an attempt to bridge the funding gap. There is IRS guidance on the interaction of HSAs and other Health Arrangements.

Obviously, legal advise is paramount in plan design and drafting.

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The average corporate health benefit expenditure in 2008 will be $9,312 per employee—an increase of 7 percent over 2007—with annual per-employee contributions exceeding $2,000, according to Towers Perrin's 2008 Health Care Cost Survey. Some highlights of the survey are as follows:

• Employers are expecting to subsidize 78 percent of next year's premium costs, and employees will have to cover the remaining 22 percent, plus usage-based co-pays, deductibles and co-insurance.
• Employee contributions, on average, will jump by $156 per employee per year to $2,040, an 8 percent increase that is roughly twice that of annual employee merit increases.
• Analyzing the data by coverage level, the average reported 2008 cost of annual medical coverage will be:
  • Employee-only coverage:              $4,704
  • Employee-plus-one coverage:       $9,660
  • Family coverage:                         $13,704

The Towers Perrin Survey also tracks the cost variations across “High-Performing” and “Low-Performing” Companies noting a cost disparity per employee per year of $8,844 and $10,320 which is explained as follows:

According to the Towers Perrin data, these [high-performing] companies have clear strategies in place to drive improvements in employees’ overall health and wellness, engagement in health care decisions and health-related behaviors, as well as to identify problems early and take advantage of opportunities for improvement by understanding the current state of their benefit program and the health care system overall.

To the extent that high performance is enhanced by plan design, I am seeing a strong trend to High Deductible Health Plans coupled with either Health Savings Accounts, Medical Savings Accounts or Health Reimbursement Arrangements. The pros and cons of some of these arrangements have been discussed previously in Problems with Health Savings Accounts (HSA). 

There is also a clear trend among employers to adopt wellness programs with financial incentives for behavior changes.  Some of the issue surrounding wellness programs have been discussed in Wellness Programs Must Comply with HIPAA Restriction;Successful Wellness Programs Implemented by D&E Communications;  Sizing Up Obesity: Can Wellness Programs Curb BMI?

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What is Body Mass Index (BMI)? BMI has become the unofficial scientific measure for assessing obesity. BMI is a function of height and weight (BMI calculator).   The Center for Disease Control classifies a person who has a BMI of less than 18.5 as underweight; normal is 18.5-24.9; overweight is 25-29.9; obese is over 30; and extremely obese is over 40.

What is the BMI analysis telling us about our weight?   A Report by the Trust for America's Health recently disclosed statistics about obesity trends.  In the Report, Pennsylvania had the 23^rd highest rate of adult obesity with 24.5 percent of its population having a BMI over 30.   The Report correlated obesity figures with other factors like Diabetes and Hypertension rates. It also noted levels of admitted physical activity (or inactivity). Twenty-Four percent of Pennsylvanians admit no physical activity.

How good is BMI as a measure of obesity?   Martica Heaner points out the limitations of BMI in her posts BMI Blues and Is Body Mass Index a Bad Measure?:

The BMI works well for research purposes, but doesn’t necessarily translate precisely to the individual. Unfortunately, it tends to convey that people that exercise regularly, for example, are overweight, when they are not actually overfat.  A fit person tends to have more muscle, so their body weight is a reflection of body fat as well as muscle and other lean tissue. 

Since the problem with being overfat is that health risks are increased, a BMI in the overweight range is probably not a negative indicator for a fit person. Regular exercise, low body fat and increased muscle mass are all factors that tend to outweigh any health risks suggested by a higher BMI.

Is there correlation between high BMI and bad health? According to the CDC, the BMI ranges were established based on the health consequences associated with obesity as determined by different BMIs. Some challenge this conclusion saying  that the obesity/health correlation is a myth. However, this the correlation between high BMI and bad health is quickly becoming an assumption.   Others have even gone as far as implying that there is a "conspiracy" perpetuated by those who are making fortunes in weight loss products.

Other than being incorrectly labeled "overweight" or "obese", why should we care whether BMI is a accurate health status predictor? BMI is fast becoming the legal standard for determining whether someone is "obese" and therefore a "health risk". With this label comes a whole host of employment and benefit consequences:

• Cost of and Eligibility for Certain Employee Benefits

Individual insurance policies for life, disability and medical insurance almost universally use underwriting procedures that take into account BMI as a basis for determining insurability and premium.  A survey by the Texas Office of Public Insurance Counsel found that insurance company individual health plan underwriting guidelines used BMI as a basis to deny coverage, charge a higher premium, and offer less coverage. The California Insurance Commission has made comments alerting consumers about BMI as a basis for insurance denial.

Some group health plans are community rated and not subject to medical underwriting. These plans calculate premium based on the expected claims of the community not the individual employer group.  Other group health insurance programs can be subject to medical underwriting in which BMI analysis and other factors will be used to price the coverage for the group.  An employer with  a compliment of employees with potential for high claims (including high BMI) will face higher premiums or denial. Likewise, self-insured medical plans that utilize stop loss coverage may undergo medical underwriting where BMI will be factored into the rate for reinsurance..

Group health plan wellness program incentives may be keyed to BMI targets for premium discounts and other incentives.  The availability of incentives to those with high BMI is subject to limitations including situations when it is "unreasonably difficult" or "medically inadvisable" for a participant to attempt to achieve the BMI standard.

• Employment Discrimination

Under the rationale in EEOC v. Watkins Motor Lines, Inc., being overweight and even obese is not generally considered a "disability".    On the other hand, severe obesity, which has been defined as BMI greater than 40, is clearly an impairment.   In addition, a person with obesity may have an underlying or resultant physiological disorder, such as hypertension or a thyroid disorder. A physiological disorder is an impairment. See 29 C.F.R. § 1630.2(h). Employee who are regarded as disabled due to obesity are also protected under the ADA.

The ADA prohibits disability based distinctions in health plans. So far the EEOC's Guidance in this area has not classified obesity as prohibited basis for making distinctions. However, if the presumption of health risks continues to be tied to BMI, this area may be reevaluated.

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News outlets have offered up a smorgasbord of statistics highlighting America's weight problem based on the upward trend of the average Body Mass Index (BMI).  The annual cost to employers of obesity is estimated to exceed $13 billion leading some large employers to announced plans to fight obesity among employees.  The primary vehicles for employers to proactively combat employee health issues take the form of education or premium discounts offered in connection with wellness programs.  I have posted on wellness programs before by highlighting successful programs and providing commentary on the process for adopting one.

Typical stand alone wellness program focuses on education as a means of changing employee lifestyles from unhealthy to healthy. The typical incentive plans tie health premium discounts to participation in wellness initiatives. Such actions by insurers have been applauded in the Health Care Policy and Marketplace Review which noted new program announced by United Health, in which health plan participants who take tests and other evaluations to prove they are meeting goals for blood pressure, cholesterol, height/weight ratio, and smoking status would be eligible to receive $500 reductions in their health plan deductible ($1,000 family) for every goal met.  However, many others refer to such actions as fining employees for poor health screening scores.

Nonetheless, legal restrictions curb an employer's flexibility in utilizing healthy living incentives.  Under HIPAA regulations that became effective on July 1, 2007, wellness programs that give rewards for healthy conduct or that penalize unhealthy activities must meet all of the five following standards:

• Limited Reward:       All rewards offered under the program must not exceed 20% of the cost of coverage (total amount of employee and employer contribution). The reward can be in the form of a discount or rebate of premium or contribution; waiver of deductible, co-payment or coinsurance; or the value of a benefit provided under the plan.

• Reasonably Designed to Promote Health or Prevent Disease:    The plan must have a reasonable chance of improving health or preventing disease in a way that is not overly burdensome.

• No More that Annual Qualification for Award:    Individuals eligible to participate must be given the opportunity to qualify at least once a year.

• Uniform Reward Availability for "Similarly Situated" Individuals: The reward must be available to all similarly situated individuals and there must be a reasonable alternative for receiving the reward for any individual for whom it is unreasonably difficult due to a medical condition or for whom it is medically inadvisable to attempt to obtain the applicable standard. Physician verification may be required.

• Plan Material must Describe all Terms:     The plan must describe all terms of the program and the availability of a reasonable alternative. The following language may be used to satisfy the alternative:

"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           and we will work with you to develop another way to qualify for the reward."

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Harley Davidson workers have approved a new contract, ending the three week strike that included disputes over wages and healthcare premiums. According to WHTM, ABC News of Harrisburg, the new contract provides that "Workers will not pay health insurance premiums, but deductibles and co-pays will increase." This resolution stops short of the trend toward consumer driven healthcare plans. However, increasing out of pocket healthcare expenses for consumers is a step towards making them more aware of the increased cost of healthcare. Insurance analysts hope this will result in consumers taking a more vested interest in their healthcare costs.

 

Is this an effective approach or will it result in consumers foregoing needed healthcare? There is a fairly comprehensive analysis of consumer driven healthcare at ConsumerDrivenHealthCare.us: Guide to Options in Consumer Driven Health Care. In the coming years, employers will be faced with many difficult decisions as they attempt to slow the rapidly rising cost of healthcare coverage for employees.  A recent report by the Centers for Medicare and Medicaid Services predicts that health care is expected to account for $1 of every $5 spent in the United States in another decade.  Decision makers will need to become educated on the options available and the consequences of the plans they choose.

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