Can we Incentivize Employees with High Claims Costs to Opt Out?
Question: Our company offers coverage under a self-insured major medical plan to full-time employees. Can we offer cash incentives to those with a history of high claims costs to opt out of our plan and buy individual policies instead?
Answer: In a word, no. This idea was addressed in guidance jointly issued just last year by the IRS, the Department of Labor and the Department of Health and Human Services. The agencies stated that offering a choice between cash and enrollment in an employer’s standard group health plan constitutes prohibited health status discrimination under the Affordable Care Act (ACA) and the Health Insurance Portability and Accountability Act (HIPAA) — if the offer is made to only employees with high claims risk.
It may seem like you’re treating high-claims employees more favorably by giving them a choice between cash and coverage — especially now that the ACA guarantees availability of individual coverage without pre-existing condition exclusions. But the agencies don’t view this choice as permitted discrimination in favor of individuals who have adverse health conditions.
In fact, according to the agencies, these employees have a greater effective cost of coverage because their cost is deemed to include the cash they’ll forgo if they elect to enroll in your plan. In addition, the cash-or-coverage offer is considered to be an eligibility rule that discourages plan participation based on a health factor.
Additional points of concern
Indeed, the agencies view these arrangements as discriminatory, regardless of whether:
- The cash payment is pretax or after-tax to the employee,
- The employer is involved in the selection or purchase of individual insurance policies, or
- The employee obtains any individual coverage.
And because choosing between cash and tax-favored health coverage requires a cafeteria plan election, the agencies assert that imposing an additional cost to elect health coverage could result in prohibited discrimination under Section 125 of the Internal Revenue Code.
Note also that you couldn’t condition availability of any financial incentive (whether or not based on health or claims history) on the employee’s actual purchase of an individual insurance policy. Doing so creates an employer payment plan that violates the ACA’s prohibition on annual dollar limits, as well as the requirement to provide coverage of preventive services. Violating these provisions can result in substantial excise taxes.
Moreover, the proposed incentive might raise concerns under HIPAA’s privacy rule if you’re considered to be using protected health information (in this case, health or claims history) for a purpose unrelated to plan administration (that is, to identify employees eligible for the cash incentive). Other federal laws, such as the Americans with Disabilities Act or the Age Discrimination in Employment Act, could also be implicated.
When considering going this route with your health care plan, it’s best to imagine one of those “wrong way” signs you see while driving. Despite your good intentions, you’ll quickly find yourself headed straight for some serious compliance issues.