United States: The Value - And Peril - Of Imposing A Premium Differential On Smokers

Considerations for policies that treat smokers, non-smokers differently

Healthcare employers have been at the forefront in educating their employees and the general public about the benefits of not smoking and in implementing smoke-free environments; and rightly so, as their mission dovetails with the importance of a healthy lifestyle. Particularly in recent times, all employers have had to contend with skyrocketing increases in health insurance premiums. Many employers are wisely seeking ways to manage and, if possible, limit those costs. And, again, healthcare is well-positioned to offer leadership for those efforts. A significant way in which to do so is to focus on the lifestyle choices of employees and how those choices might influence premium costs. In this context, one lifestyle choice that should receive considerable attention is smoking and the use of other tobacco products.

It is a truism today that smoking can have a calamitous effect on one's health, but many do not fully appreciate its other deleterious effects, including its significant impact on employee productivity. A recent study of 20,000 employees showed smokers had more hospital visits per 1,000 employees (124 vs. 76), had a longer average length of stay (6.5 vs. 5 days) and made six more visits to healthcare facilities per year than non-smokers.  

Another study concluded that smokers missed an average of about 6.16 days of work per year, as opposed to 3.86 days missed by non-smokers. And a smoker taking four 10-minute smoke breaks per day actually worked one month less per year than non-smoking employees.

The Centers for Disease Control estimate that for each smoking employee, an employer shoulders an additional $3,391 per year in costs — including $1,760 in lost productivity and $1,623 in excess medical expenses.

So, not only is encouraging individuals to quit smoking important from a health standpoint, but such efforts can have a dramatic positive effect on productivity. With this in mind, healthcare employers should focus on what they can do to promote smoking cessation, either through a carrot or stick approach, or though both approaches in tandem.  

The "carrot" of rewarding employees who do not smoke with lower premiums, or put another way, the "stick" of increasing premiums paid by smokers, can be effective tools in promoting a non-smoking lifestyle.  Indeed, this notion is finding increasing acceptance among both private and public employers. Numerous state governments and private companies such as Macy's and PepsiCo. have begun to charge higher insurance premiums to employees who smoke, and some companies even refuse to hire smokers. In this same vein, the Patient Protection Affordable Health Care Act actually recognizes the increased healthcare costs associated with smoking employees by allowing insurers to raise smokers' insurance premiums up to 50 percent over those paid by non-smokers.

Smoking clearly is the kind of lifestyle choice that impacts healthcare costs and may legitimately affect premium rates, but are there pitfalls in imposing additional costs on smokers? As with almost any decision affecting employees, implementing premium differentials involves some risk, and the decision to do so should involve due concern for those risks. For one, the Health Insurance Portability and Accountability Act prohibits employees in a group health insurance plan from being charged more for coverage because of a "health factor," which includes health status, medical condition and claims experience, among other things. Although lifestyle choices such as smoking are not named as health factors, medical opinion exists identifying nicotine addiction as a medical condition. HIPAA does, however, allow employers some leeway to maintain a premium differential as long as they establish a non-smoking program as part of a wellness program providing a "reward" for participation in the form of a reduced premium for not smoking. The wellness program must satisfy the following four requirements:

  • The "reward" is no more than 20 percent of the total premium;
  • The program is reasonably designed to promote health and prevent disease;
  • Eligible employees must be given an opportunity to qualify for the reward at least once a year; and
  • A reasonable alternative must be given to employees for whom it is unreasonably difficult to stop smoking such as attending educational classes. And, all program materials must disclose the availability of the alternative.

Another potential legal problem arises from the Americans with Disabilities Act's prohibition against discriminating in benefits with respect to qualified individuals with disabilities. Although smoking has yet to be identified as, itself, a disability, it often does involve attendant health issues that are disabilities, and there is always a possibility that a court would accept a claim on the theory that a smoker was "regarded as" being disabled. Still, it also is likely that having an acceptable wellness program would provide some insulation from such outcomes.

Proponents for smokers also have argued that, as the less affluent, less educated are much more likely to smoke and to fail to participate in wellness and smoke cessation programs, imposing a premium cost for those choices has a disproportionate adverse impact on such people, which may amount to racial or national origin discrimination. The idea here is that minorities and certain ethnicities are much more likely to be smokers. A related argument is that smoking is often not so much a matter of choice, but an addiction that began earlier in life. While these kind of arguments have yet to establish much legal traction, in the right context, they will be advanced.

Some potential state law concerns also could arise when an employer imposes a premium differential. Namely, there are a few states that explicitly prohibit discrimination against smokers. In addition, some states have laws protecting employees who engage in legal off-duty conduct such as smoking.

While there are legal concerns with doing so, there are compelling reasons to implement a premium differential for smokers as opposed to non-smokers. But, what should an employer consider and do before putting such a program in place?

First, determine if the state in which the employer wishes to implement a differential has any law that would make it illegal to do so. Even if such a law exists, all may not be lost as some state laws may be preempted by federal law.

Second, upper management must be fully advised of the potential pitfalls, as well as the benefits of adopting tiered premiums. This would include the costs associated with a wellness program.

Third, if the employer has a union, a premium differential for smokers probably would be a mandatory subject of bargaining. Unionized employers must then consider their bargaining obligations before implementation.

Fourth, establishing a compliant wellness program, with an attendant smoke cessation program, as well as alternative mechanisms for some smokers, are key components of any decision to impose a premium differential. There are numerous providers for such programs, often insurers, and the advice of an attorney also would be fruitful.  

Fifth, once a program has been implemented, the employer should monitor the impact of the differential to determine if it results in a disparate impact on employees in protected groups such as minorities and protected ethnicities.  

Sixth, due consideration should be given to an ongoing assessment of the impact of a premium differential on employee morale, productivity and the overall culture of the workplace.

Even given the potential issues involved in charging smokers more for healthcare premiums, with effective wellness programs, employers can, and have, been able to manage healthcare costs and enhance employee productivity. Smoking unquestionably has a deleterious effect not just on overall health, but also on employee productivity. But there are programs and mechanisms an employer can use to enhance both for its employees.

Originally published in Becker's Hospital Review - March 2014

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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