Can Insurance Cost More for the Unvaccinated?

By Ted Baran

With the challenges of pandemics in the modern healthcare system, employers are being forced to consider possible changes to insurance programs, including surcharges for employees that remain unvaccinated.

The COVID-19 pandemic has created a financial burden for the U.S. healthcare system. With an average hospitalization expense of $25,000 for severe inpatient cases, $60,000 for critical no-ventilator cases and $126,410 for critical ventilator cases, businesses and health insurers have spent many billions of dollars on medical care since the outbreak began.

Not surprisingly, the financial stresses are mounting. According to the U.S. Centers for Disease Control and Prevention, the U.S. had 37,000 preventable COVID-19 hospital admissions in June 2021, with another 76,000 in July. The cost of treating preventable COVID-19 illnesses was $2.3 billion in June and July 2021 alone, according to the Peterson-KFF Health System Tracker.

Meanwhile, the emergence of the Delta COVID-19 variant, the U.S. Government’s recently announced vaccine mandates and the ongoing reluctance of some of the U.S. population to get vaccinated have put U.S. employers in a bind. They don’t want to force unwilling employees to get vaccinated. Businesses also don’t want to run afoul of the new federal mandates or incur medical costs that could put their health plans—and income statements—in jeopardy. Most importantly, they want to assure a safe working environment for workers during the transition back to full or partial onsite work.

Are Premium Surcharges the Answer?

Premium surcharges may be an idea whose time has come. In August 2021, Delta Airlines became the largest employer to institute a health insurance premium surcharge for unvaccinated employees. It decided to charge unvaccinated employees an additional $200 a month to stay on their health insurance without getting vaccinated. The surcharge was slated to begin on November 1, but in the two weeks after it went public, 20% of Delta’s unvaccinated employees decided to take “the jab.” What’s more, the company said it did not suffer high employee turnover after the announcement.

Given Delta’s and other company’s experiences, the idea of charging unvaccinated employees extra for their health insurance has gained traction. One reason is that surcharges for the unvaccinated are similar conceptually to tobacco-user surcharges, which are common and well accepted. If a worker refuses to get vaccinated and contracts COVID-19, it will increase the firm’s medical claim costs, just as smoking employees increase heart disease and cancer health insurance claims. As COVID-19 expenses soar, future premiums and employee health plan contributions will spike, as well.

Employers also believe that most employees will accept premium surcharges. According to a survey from Eagle Hill Consulting, 41% of workers think unvaccinated employees should pay higher insurance rates. A majority also believe employers should take punitive actions against the unvaccinated. For instance, sixty-three percent say non-vaccinated workers should not be allowed to work from home and 51% believe they should not be allowed to travel for work.

Employers also like surcharges because they preserve employee choice for the unvaccinated, while providing a strong nudge for them to get vaccinated. According to one survey, 43% of unvaccinated workers said they would definitely get the shot if the alternative was to pay a health insurance surcharge. Another 24% of employees said a surcharge might motivate them to get vaccinated.

Keeping It Legal

Although the financial argument for surcharges may be strong, lawyers and benefit consultants have been busy addressing the legal implications. The bottom line? Premium hikes are legal as long as employers position them as a wellness incentive (like smoking cessation programs). However, since multiple federal rules are involved, from the Department of Labor, Department of Health and Human Services and the U.S. Treasury, employers must proceed carefully in order to avoid regulatory issues.

According to the legal firm Fisher Phillips, there are six questions employers must answer before adopting such a program:

• Is the surcharge in compliance with wellness incentive limits? It should amount to no more than 30% of the total cost of employee-only health coverage (60% for tobacco surcharges). If adding a premium surcharge puts employers over the limit, they’ll need to consider eliminating or reducing other wellness incentives to get them below the requisite benchmark.
• Does adding a surcharge affect compliance with ACA employer mandate affordability rules? According to Fisher Phillips, non-tobacco related wellness incentives should be handled as “not met” in order to determine ACA affordability. Increasing employee health premiums, in effect, boosts their insurance costs and makes it harder to offer the coverage at an affordable contribution amount.
• Can the surcharge be implemented in the middle of a plan year? If so, will employees be able to opt-out if they face a large cost increase?
• Does the reasonable alternative standard offered comply with activity-only or outcome-based rules? A wellness program that gives a premium reduction for participants who participate in an activity (example: walking a minimum number of steps per day) would be considered an activity-based program. In this case, employers must provide an alternative way to earn the premium reduction if it’s physically difficult for employees to perform the activity. A program that offers a premium incentive for achieving a certain outcome (example: quitting smoking) must give employees a reasonable alternative to anyone who requests it.
• Do state laws prevent or limit a premium surcharge? If so, employers must abandon or adjust their surcharge effort.
• How will companies handle booster shots? Will they require employees to take a booster shot to earn the incentive? How will they determine that a booster shot is required to achieve fully vaccinated status?

Finally, Fisher Phillips advises employers to avoid either limiting health plan coverage to vaccinated employees or limiting the scope of coverage for unvaccinated workers. Either approach would violate HIPAA non-discrimination rules.

Privacy Concerns

People who oppose vaccines argue that disclosing their vaccine status to their employer is a HIPAA privacy violation. Since they oppose sharing their status, this means implementing a premium surcharge would be impossible to implement.

In response to these concerns, the Health and Human Services Office for Civil Rights (OCR) reminded the public in September 2021 that the HIPAA Privacy Rule does not apply to employers or employment records. That’s because the rule only addresses HIPAA-covered entities such as health plans, health care clearinghouses and health care providers that conduct standard electronic transactions and to some extent their business associates.

Furthermore, the Privacy Rule doesn’t apply to employment records, including those held by covered entities in their capacity as employers. In general, the Privacy Rule does not regulate what information can be requested from employees as part of the terms and conditions of their employment.

Impact on Agents

If you sell business health insurance, the issue of premium surcharges for unvaccinated employees will likely be of keen interest to your clients, especially to those who have experienced a surge in their health claim costs during the pandemic. How should you advise them? Here are three points to consider:

• Track compliance developments in this area so you can provide value-added information to your clients. If you can help them steer clear of compliance problems, they will value your advice and be more inclined to purchase additional insurance from you.
• Reach out to your clients periodically to discuss their claims experience. If it has deteriorated during the pandemic, discuss measures they can take to offset the losses, including instituting premium surcharges. These steps will be especially important for companies with self-funded plans.
• Given the complexity of the decision, urge your clients to seek legal advice before instituting a premium surcharge for unvaccinated employees. Although you may have significant experience with health insurance compliance matters, there are so many complex rules involved you should involve legal counsel early in the planning process to prevent compliance trouble.

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