Feature Article

States Seek to Reduce Healthcare Costs

As a way to rein in rising health care costs, some states are charging public employees who use tobacco products more for their health insurance premiums.  Georgia recently passed a law which requires public employees who admit to using tobacco in the past year to pay a $40 surcharge on their health insurance premiums.  Georgia workers will also be assessed the surcharge if a family member who is covered under the plan admits to tobacco use.  Beginning October 1st , Alabama will impose a tobacco-use surcharge on their public employees.  Three other states, Kentucky, South Dakota, and West Virginia, currently have tobacco-use health insurance premium surcharge policies in place.

The tobacco related costs incurred by employers such as state governments are significant.  The American Cancer Society reports that employees who smoke make about six more visits to health care facilities per year than do nonsmokers.  Additionally, smokers have a longer average length of stay, higher average costs for outpatient visits, and a higher average insured payment for health care.  Average lifetime medical care costs for smokers are 24 to 32 percent more than for nonsmokers.  These additional costs can make a real impact on state budgets in a time when states are looking for ways to reduce expenses.

While we can expect more state governments to enact tobacco-use premium differential policies in the future, new federal rules due out this year will limit the ability of private employers to implement premium differential policies of their own.  Revised rules to the Health Insurance Portability and Accountability Act (HIPAA) (a collection of federal laws which govern many provisions of health benefits) will prohibit private employers from charging employees more for health insurance due to tobacco-use status.  HIPAA contains a nondiscrimination section, which government plans can opt out of, that generally prohibits group health plans, such as the ones administered by employers, from requiring plan participants to pay more for their insurance simply because the participant has a "health factor."  Nicotine addiction is considered a health factor.

As with most rules, however, there is an exception to this one.  The nondiscrimination requirement does not apply if employers fall within the "wellness program" exception.  The wellness program exception states that employers may charge premium differentials as part of an overall "wellness program."  Up until now, HIPAA has not provided a definition for the term "wellness program."  The new rules provide the missing definition.  Under the updated wellness program guidelines, employers must drop tobacco-use premium surcharges for employees who participate in smoking cessation programs, even if they do not ultimately quit smoking.

Texas Instruments Inc., a technology company based in Texas, currently has a model wellness program that complies with HIPAA's new rules.   Employees who smoke must pay a monthly premium surcharge of $11.  The company, however, provides smokers who want the surcharge removed with a reasonable alternative to quitting.  If an employee who smokes completes a smoking cessation course, which is offered several times per year, the surcharge is dropped regardless of whether the employee actually stops smoking.

With no end in site to rising health care prices, employers will continue to search for ways to reduce unnecessary expenses, such as the expense associated with tobacco use.  Premium differentials and wellness programs will be useful tools for employers as they struggle to reduce costs while maintaining quality health insurance benefits for their employees.