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OUTCOME-BASED
INCENTIVES:
How the PPACA
Revolutionized Wellness
By Victor A. Adefuye

2. 1. Employees must be given an opportunity to qualify for the
reward at least once a year
2. The total amount of the reward cannot exceed 30 percent of the
cost of an individual health plan (or 50 percent for tobacco
cessation)
3. The same, full reward must be available to all similarly situated
employees
4. The program must be reasonably designed to promote health
and prevent disease, and must not be a subterfuge for discrimi-
nation. In order to meet this rule, the final regulations require
outcome-based programs to provide a reasonable alternative to
any individual who does not meet the initial standard based on a
measurement, test or screening.
5. All plan materials describing the terms of a health-contingent
wellness program must disclose: 1) the availability of a reason-
able alternative standard (and, if applicable, the possibility of a
waiver ); 2) contact information for requesting an alternative
standard; and 3) a statement that recommendations of the
employee’s personal physician will be accommodated.
The History Behind Outcome-Based
Incentives
The most controversial aspects of the final regulations relate to
health-contingent, outcome-based programs—but they also
provide the greatest opportunity. Safeway, the supermarket chain,
led the charge for inserting the health-contingent rules into the
PPACA, largely motivated by its positive experience in tying well-
ness incentives to health outcomes. Since implementing such a
program in 2009, the company has seen notable results, both in
lowering the health risks of its population and decreasing health
spending. According to Safeway, among employees who didn’t
qualify for premium deductions in 2010, due to their biometric
results, 44 percent improved their glucose levels, 63 percent
improved their blood pressure, 47 percent improved their choles-
terol levels, 15 percent reduced their BMI and 18 percent reduced
their use of nicotine.
Safeway’s reports on the economic impact of their program has
been similarly impressive: As of 2011, and as a consequence of
taking a variety of cost-saving measures, Safeway’s all-inclusive
health care costs per capita (Safeway contribution + employee
premium + employee out-of-pocket) index remained at the same
level as in 2005. Over the same period, national health care costs
have increased more than 60 percent.
Although some have challenged Safeway’s cost-saving accounting,
the company stands by its reports. But more importantly, the
potential for significant savings is backed by research. Studies have
shown that obesity and related diseases cost employers $93 billion
a year in insurance claims, with an obese employee on average
spending more than $1,400 in additional health expenses annually.
WWW.IPMA-HR.ORG SEPTEMBER 2013 | 9 |
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O
n May 29, 2013, a group of federal agencies charged with
defining and enforcing the wellness provisions of the
Patient Protection and Affordable Care Act (PPACA)
released the final version of rules that will govern all employer-
sponsored wellness programs, starting in January 2014. These final
regulations have been highly anticipated, as they clarify some of
the confusion created by earlier versions of the rules. Although
some remain anxious about remaining complexities, the flexibility
provided by the final regulations create a unique opportunity for all
employers to implement comprehensive, results-driven wellness
programs that reach the most at-risk employees and are most likely
to produce results.
Legal Background
The PPACA’s wellness rules are best understood in the context of
HIPAA, The Health Insurance Portability and Accountability Act
of 1996, which prohibits group health plans from discriminating
against individuals in eligibility, benefits or premiums based on a
health factor. In other words, HIPAA is the reason all individuals
and families in an employer-sponsored plan pay the same rates,
regardless of their health status or behaviors. However, HIPAA
provides an exception for employer “wellness programs,” which
focus on promoting workforce health. Originally published in
2006, the HIPPA exception categorized wellness programs as
either “participatory” or “health-contingent,” and established
requirements for each type of program to qualify for the exception.
The PPACA further defined the two categories of wellness
programs and expanded the ability of employers to use financial
incentives to motivate behavior change.
The first category of wellness programs, defined as “participatory,”
rewards employees who engage in a health-related event (e.g., a
health fair or activity, such as going to the gym) by reimbursing
them.The incentive is linked to participation (showing up)—not
achieving a specific health standard. Participatory wellness programs
will not violate HIPAA’s non-discrimination rule if they are available
to all similarly-situated employees, without regard to health status.
Alternatively, the second category, “health-contingent” wellness
programs, rewards employees for achieving a health-related standard.
The final regulations further divide health contingent programs
into two subcategories: 1) activity only programs; and 2) outcome-
based programs. Activity-only programs require an employee to
perform an activity related to a health factor, but do not require the
individual to attain or maintain a specific health outcome. For
example, the employee may have to complete a walking, diet, or
exercise challenge in order to receive the incentive. Outcome-based
programs, on the other hand, meet the traditional health-contin-
gent definition: to receive a reward, an employee is required to
attain or maintain a specific health outcome (such as not smoking
or achieving certain results on biometric screenings).
To qualify for the HIPAA exception, all health contingent wellness
programs must satisfy five requirements: CONTINUED ON PAGE 10

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The cost of employing a smoker has recently been estimated to be
approximately $5,000 per year, in both direct health claims and
indirect costs, including the lost productivity associated with ciga-
rette breaks. Type-2 Diabetes, a largely preventable disease, has
been reported to cost the U.S. a total of $245 billion for diagnosed
cases, $176 billion in direct medical costs and $69 billion in
reduced productivity. According to the Harvard School of Public
Health, “about nine cases in 10 [of Type-2 Diabetes] could be
avoided by taking several simple steps: keeping weight under
control, exercising more, eating a healthy diet, and not smoking.”
Why Outcome-Based Programs
Offer So Much Potential
Under the outcome-based model, which ties rewards (measured as
a percentage of the premium paid for an individual health plan) to
achieving specified health targets, the government is essentially
allowing some consideration of health status in establishing
employee contribution levels towards health insurance. Although
this is revolutionary in the health insurance space, pricing as a
reflection of risk is standard practice in every other type of insur-
ance. We all agree that flood insurance for a beach house in hurri-
cane-prone Florida should be higher than a home in central
Kansas. An accident-prone driver rightfully pays more for auto
insurance than someone who has never had a traffic violation.
However, risk and behavior has, for the most part, been removed
from the pricing mechanism of health insurance, particularly for
plans received through the employer. There are good reasons for
this, of course (e.g., many expensive medical conditions develop
beyond individual control). But ignoring risk in the pricing of
health insurance also removes the incentive for insureds to adopt
healthier behaviors within their control. In fact, nearly 75 percent
of health spending is due to chronic conditions, many of which are
related to poor nutrition, lack of physical activity, smoking and
excessive alcohol consumption. Unhealthy behaviors are the
primary risk of mortality in the United States, even more than an
individual’s heredity. But unlike genetic predisposition, some of the
biggest health risks present themselves in easily observable symp-
toms/behaviors (like high blood pressure, cholesterol, glucose
levels, BMI or tobacco use). They are the precursors to stroke,
cancer, heart disease and diabetes—the most widespread and
expensive burdens our nation’s balance sheet (and those of every
employer).
Simply stated, the PAACA’s health-contingent programs are
designed to create more awareness and personal responsibility in
health insurance. But to avoid outright underwriting and discrimi-
nation, the final wellness regulations cap the amount of allowable
premium shifting (up to 30 percent of the cost of an individual
health plan, or 50 percent in the case of tobacco use), and restrict
the use of outcome-based pricing as an incentive for achieving or
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PPACA CONTINUED FROM PAGE 9
making progress towards health goals. Although an employer can
require different premium contribution levels from workers with,
for example, high blood pressure, cholesterol, glucose levels, BMI
or another other biometric standard, an employee who fails to meet
the initial, healthy standard must be granted an opportunity to
receive a “rebate” by meeting a lower, alternative goal (established
and financed by the employer). In other words, an employee who is
required to pay more for having a BMI over 30 (the threshold for
“obesity,” which triggers a significant increase in health risks and
associated costs) must be allowed to earn back the premium differ-
ential by attending a weight-loss program, or meeting a lower,
weight-related goal, such as dropping five percent of his body
weight. In defining these lower health standards, it is probably best
practice for the employer to work with the individual’s doctor to
determine a goal that is both achievable and medically advisable.
Such collaboration can create higher employee motivation and
“buy-in.”
While some employers have argued that the requirement for a
“reasonable alternative standard” waters down the outcome-based
approach, this concern is overblown and inconsistent with the
spirit of the law. The rules are clearly designed to encourage
employees to “know their numbers,” and for those outside the
healthy range to take concrete, incremental steps towards improve-
ment. They are not intended to punish unhealthy people or simply
burden them with higher health insurance costs. A more health-
conscious and engaged population is essential to any hope of
containing rising health care costs. The status quo—where health
risk factors are ignored—is simply unsustainable.
The Future of Wellness
(or Wellness 2.0)
Outcome-based incentives provide a foundation for the most effec-
tive corporate wellness initiatives of the future. But this new para-
digm will require a more expansive notion of wellness than is
currently practiced by most employers. Simply rolling out different
premium rates connected to heath status is a risky proposition, not
least for the potentially negative effect on employee morale. This is
a new idea, and Americans are naturally averse to being told how
to live their lives. Thus, to be successful, outcome-based wellness
programs must be thoughtfully and sensitively designed and imple-
mented. Above all, they require an effective communication strat-
egy that presents the effort as an expression of the employer’s
concern for employee wellbeing, and a necessary collaboration by
both sides to produce a healthier workforce.
Under the final regulations, outcome-based programs must also be
“reasonably designed” to promote health and prevent disease.
Although the term is not specifically defined in the law, a recent
memo by notable health experts (including the American Heart
Association, American Cancer Society, and the American Diabetes
Association, among others) provides useful guidance to employers.
In a 2012 joint statement, the group concluded that that a success-
ful, “reasonably designed” outcome-based program must be guided

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by goal-oriented, strategic planning; employ evidence-based
behavioral interventions (like coaching, health education and other
individualized programs); offer various opportunities to engage
employees in their health (such as the use of technology and
“gamification”); and maintain a consistent focus on measuring and
analyzing the impact of the program, making changes when neces-
sary. Most importantly, the program must be delivered within a
supportive environment, where the organization’s leadership, poli-
cies, practices, and culture deliberately promote employee health
and wellbeing.
This new, comprehensive paradigm is the wellness program of the
future; one we like to call “Wellness 2.0.” Previous efforts by most
employers, though admirable, have failed to produce the levels of
engagement and results that are necessary if the nation, and
employers, expect to control health spending. These “Wellness 1.0”
programs are evidenced by uncoordinated, piecemeal efforts—often
managed by already overwhelmed HR teams—that only reach the
small segment of the population already concerned with their
health (e.g., gym reimbursements that merely subsidize the healthy,
and HRAs with no follow-up for those with established risk
factors). By failing to reach the high risk employees, is there any
surprise that Wellness 1.0 programs fall short of their potential?
Conclusion
The PPACA’s promotion of “outcome-based” wellness programs is
a welcome development in the journey towards a healthier Amer-
ica. This new incentive structure offers a future where all employ-
ees are aware of their risk factors and receive support and guidance
on healthy living from their employer. By engaging the most at-
risk employees, outcome-based programs allow employers to posi-
tively impact the health of their workforce and control costs. At a
minimum, they promote greater personal responsibility in health
insurance, and allow employers to realize savings through addi-
tional premium contributions from those who choose to ignore
their health. Employers should strongly consider the outcome-
based wellness model. Although extrinsic rewards alone cannot
sustain the type of long-term behavior change required to live a
healthier life, the meaningful financial incentives encouraged by
the PPACA, when structured correctly and delivered through a
supportive culture of wellness at the workplace, offer the best hope
for creating a healthier balance sheet for our nation’s employers.
Victor A. Adefuye, Esq., is an attorney and president of
WellnessRebates, LLC, a consultant to mid-sized and large employers
looking to enhance employee productivity and control health costs
through comprehensive, results-oriented wellness programs. Prior to
joining WellnessRebates, Adefuye worked as a corporate and labor
law attorney, and as an advisor to individuals and small businesses
in the areas of financial planning and risk management. He is
passionate about using innovation, creativity and teamwork to tackle
America’s biggest challenges. For more information, please email
victor.adefuye@wellnessrebates.com or call (888) 208-2788. —N
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Join your colleagues at 1 p.m. EDT on Sept. 11 for a free and
informative webinar, sponsored by Wellness Rebates
(www.wellnessrebates.com), on wellness programs. The
Affordable Care Act’s wellness regulations have changed the way
employers will structure their programs. Our first speaker, Victor
Adefuye, will discuss how health-contingent, outcome-based
incentives have the potential for revolutionizing the concept of
wellness and provide a number of critical best practices in
designing a successful wellness program.
Our second speaker, from Larimer County, Colo., began an
employee wellness program in 2008. Wellness benefits coordi-
“Wellness Rebates” Webinar Scheduled
for September
nator Liz DeJongh will share how wellness at the county has
since evolved into a comprehensive, results-oriented effort that
includes annual health risk assessments, an employer-sponsored
medical clinic, medical insurance premium reductions tied to
certain health criteria, and more. She will discuss the strategies
used to make health part of the culture and share the successes of
such efforts, which include improved health and cost savings for
the organization, employees, and medical plan members.
Visit https://cc.readytalk.com/r/gehsgowoqgzj&eom for additional
details about the Sept. 11 webinar. —N